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As an eco-minded investor, you build your portfolio around sustainable companies that make a difference. But how can you be sure these companies are doing what they claim?
Now that non-financial information (like environmental initiatives) is driving investor decisions more than ever, today’s IPOs and public companies want to underscore their value as sustainable funds.
However, some less-than-reputable companies cut corners, outright lying about their ESG initiatives to attract green investors. Through impressive PR spin, they make themselves look more sustainable than they are.
That’s greenwashing. In today’s guide, you’ll learn all there is to know about greenwashing, so you can avoid it when building your ESG portfolio.
ESG Greenwashing: A Definition
Put simply, greenwashing is false advertising. It’s a deceptive marketing technique that exaggerates a company’s environmental commitments by using misleading information and language.
The greenwashing process can come in many forms. But the bottom line is that a company’s claims and environmental practices don’t line up.
Why Would an IPO or Public Company Lie About This?
Green-minded consumers like you are willing to put a lot of money behind sustainable funds. Last year, sustainable and ethical funds reached a record $3.9 trillion.
Growth like this gives companies enormous incentive to show they’re eco-friendly companies with sustainable practices.
An honest company with a true commitment to sustainability can effectively communicate ESG initiatives, usually because they team up with reputable ESG consultants. These professionals share their global best practices that align a company’s initiatives with global standards aimed at eliminating greenwashing.
But without ESG consultants at the helm of a sustainable strategy, companies may not be aware of these best practices. Alternatively, they may knowingly give their sustainable initiatives a polish to make them look extra shiny to investors.
What Does Greenwashing Look in Real Life?
Let’s look to the Federal Trade Commission (FTC) for guidance. Its exhaustive Green Guides outline the way companies should handle a variety of environmental marketing claims — from carbon offsets and recycled content to renewable materials and source reduction claims.
Check out these guides here. But you can find the nuts and bolts of it below.
- Vague Language: The FTC cautions companies against making broad, unqualified claims. That can include language like “environmentally friendly” or “eco-friendly” as these terms don’t mean anything in particular.
- Overstating: This greenwashing method happens when a company claims they use 50% more recycled content than before. This may seem impressive, but it’s misleading if the company only increased its recycled content from 2% to 3%. Technically true, but inaccurate.
- Empty Comparison: Another greenwashing technique to watch out for involves claims that a company uses more recycled material than a competitor or that its process uses fewer resources than before. Again, these claims lack concrete numbers, so they mean nothing.
How to Avoid Investing in a Greenwashed Fund?
A company’s eco-health is a measure you’ll want to check before adding them to your portfolio.
You can find this information online — a company with a dedicated ESG website is always a good sign. They likely teamed up with ESG consultants that advised them on global best practices, so they could share their sustainability story without greenwashing.
Note that an ESG site goes above and beyond the average investor relations website, which is where you would normally turn for financial data. So be wary of any eco-fund that doesn’t have a sustainability IR website.
Understanding the common greenwashing language used by eco-fakers can help you navigate a sustainability IR website and avoid getting duped.