What is Greenwashing & How to Avoid it in Your Portfolio?

What is Greenwashing & How to Avoid it in Your Portfolio?

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As an eco-minded investor, you construct your portfolio round sustainable corporations that make a distinction. But how are you going to make sure these corporations are doing what they declare? 

Now that non-financial info (like environmental initiatives) is driving investor selections greater than ever, at present’s IPOs and public corporations wish to underscore their worth as sustainable funds. 

However, some less-than-reputable corporations minimize corners, outright mendacity about their ESG initiatives to draw inexperienced traders. Through spectacular PR spin, they make themselves look extra sustainable than they’re.

That’s greenwashing. In at present’s information, you’ll study all there’s to learn about greenwashing, so you possibly can keep away from it when constructing your ESG portfolio. 

ESG Greenwashing: A Definition

Put merely, greenwashing is fake promoting. It’s a misleading advertising and marketing method that exaggerates an organization’s environmental commitments by utilizing deceptive info and language. 

The greenwashing course of can are available in many kinds. But the underside line is that an organization’s claims and environmental practices don’t line up. 

Why Would an IPO or Public Company Lie About This?

Green-minded customers like you might be prepared to place some huge cash behind sustainable funds. Last 12 months, sustainable and moral funds reached a report $3.9 trillion.

Growth like this offers corporations monumental incentive to point out they’re eco-friendly corporations with sustainable practices. 

An sincere firm with a real dedication to sustainability can effectively communicate ESG initiatives, normally as a result of they staff up with respected ESG consultants. These professionals share their international finest practices that align an organization’s initiatives with international requirements geared toward eliminating greenwashing. 

But with out ESG consultants on the helm of a sustainable technique, corporations might not be conscious of those finest practices. Alternatively, they could knowingly give their sustainable initiatives a polish to make them look additional shiny to traders. 

What Does Greenwashing Look in Real Life?

Let’s look to the Federal Trade Commission (FTC) for steerage. Its exhaustive Green Guides define the best way corporations ought to deal with quite a lot of environmental advertising and marketing claims — from carbon offsets and recycled content material to renewable supplies and supply discount claims. 

Check out these guides here. But you could find the nuts and bolts of it under. 

  • Vague Language: The FTC cautions corporations towards making broad, unqualified claims. That can embody language like “environmentally pleasant” or “eco-friendly” as these phrases don’t imply something particularly. 
  • Overstating: This greenwashing methodology occurs when an organization claims they use 50% extra recycled content material than earlier than. This could seem spectacular, but it surely’s deceptive if the corporate solely elevated its recycled content material from 2% to three%. Technically true, however inaccurate. 
  • Empty Comparison: Another greenwashing method to be careful for includes claims that an organization makes use of extra recycled materials than a competitor or that its course of makes use of fewer assets than earlier than. Again, these claims lack concrete numbers, so that they imply nothing. 

How to Avoid Investing in a Greenwashed Fund?

An organization’s eco-health is a measure you’ll wish to verify earlier than including them to your portfolio.

You can discover this info on-line — an organization with a devoted ESG web site is at all times a great signal. They doubtless teamed up with ESG consultants that suggested them on international finest practices, so they may share their sustainability story with out greenwashing. 

Note that an ESG web site goes above and past the common investor relations web site, which is the place you’ll usually flip for monetary information. So be cautious of any eco-fund that doesn’t have a sustainability IR web site. 

Understanding the widespread greenwashing language utilized by eco-fakers may help you navigate a sustainability IR web site and keep away from getting duped.