Investing can be a minefield. There’s no such thing as risk-free investing, and there are plenty of companies out there whose business practices may make you uncomfortable.
Environmental, social, and governance (ESG) factors are becoming more important to many investors. The world economy is transforming as we move away from fossil fuels, which will impact every company.
There’s also a growing awareness of the need for companies to treat employees ethically, focusing on diversity and inclusion in the workplace.
However, there are a lot of companies that make it seem like they’re working towards creating a better world but are just trying to make more money. These companies are known as greenwashing companies.
The following is an introduction to ethical investing and how investors can take steps to accurately spot greenwashing companies.
What is Greenwashing?
Almost every major consumer product brand makes some kind of sustainability claim these days, but it’s not always true especially considering there really aren’t any authorities providing oversight. The truth is most shoppers are not sustainability experts and can’t tell the difference between a legitimate green product and what is called ‘greenwashing.’
Greenwashing is making a product or company seem more environmentally friendly than it is. It’s named after “whitewashing,” when someone intentionally hides negative information about themselves.
A brand that practices greenwashing will try to mislead you into thinking their products are better for the environment than they are. Sometimes this happens by accident, like when a brand uses misleading terminology or doesn’t understand what goes into making a truly sustainable product.
But other times, greenwashing is more intentional, like when a company tries to conceal another environmental problem by only talking about the one sustainable aspect of their business. Either way, greenwashing hurts the environment and creates distrust among consumers.
How to Spot Greenwashing
Spotting greenwashing can be difficult — and it doesn’t help that greenwashing techniques have become increasingly sophisticated over time. Here’s a rundown of common examples:
Vague Labels
Don’t believe everything you read on a label, especially if it’s vague or uses words like “natural,” “eco-friendly,” or “environmentally safe.” These terms aren’t well regulated, so companies can use them even when they’re misleading.
Natural doesn’t always mean non-toxic, and eco-friendly doesn’t necessarily mean sustainable. Greenwashing labels often include only partial truths. The same goes for seals of approval from groups you know little about.
“All-natural” foods can contain anything from genetically modified ingredients to artificial preservatives and even high-fructose corn syrup (made from a highly processed form of corn).
Exciting Small Steps as Huge Changes
Many companies are taking small steps to switch from virgin plastic to recycled content or using more renewable energy in response to consumer demands. That’s great, but it doesn’t mean they’re eliminating their carbon footprint completely or even making a significant dent in it.
If you see a company touting itself as being “carbon neutral,” take a close look at it. For example, if it’s just offsetting travel and business operations emissions but still selling fossil-fuel-heavy products, that doesn’t live up to the hype.
Outright Lies
Some companies will claim their products are environmentally friendly when they’re not. Sometimes this is done to take advantage of consumers who want to make a difference by buying green products. In other cases, the claims are made in ignorance by people who don’t understand marketing standards for environmental claims.
Misleading Imagery
Many products use imagery that causes consumers to make incorrect inferences about a brand’s environmental friendliness. Images of trees or plants can imply that a product is natural, while pictures of animals can suggest animal testing has not been used in making the product, even though this isn’t true.
For example, a beauty product might feature photos of flowers or the ocean on its packaging or in its advertising images meant to convey naturalness and purity, even if they aren’t meaningful in terms of whether or not the product is environmentally friendly.
Lesser of Two Evils
Claims that seem reasonable if taken literally may have little relevance to the situation in which you’ll use the product. For example, a car might get great mileage compared to other vehicles in its class. However, it’s still more expensive to fuel and operate than public transportation options or even older used cars that cost less and get similar mileage. And while a new product may be “better” than the old version when evaluated in isolation, it’s essential to consider whether it’s better.
Exaggerated Claims
The most blatant form of greenwashing is when a company makes an unverifiable claim about the environmental benefits of its products or services. For example, a company might claim that its products use “10 times less energy” or that its services have “zero carbon emissions.”
Irrelevant Claims
Another common tactic is to make claims about a product’s environmental impact that doesn’t matter to consumers. For example, some companies advertise that their products are made with “natural materials” or are “biodegradable.”
These statements don’t necessarily say anything meaningful about how environmentally friendly a product is. For example, many plastics are biodegradable in the same way that most natural things are biodegradable, very slowly over many years or decades under normal conditions.
The sin of the Hidden Trade-Off
The sin of hidden trade-off is greenwashing at its most basic level. It occurs when a company claims its environmental impact without addressing its broader effects on society or the environment. By failing to acknowledge these broader impacts or ignoring them entirely, greenwashing companies can convince their customers that they’re “green” without actually being so, which can be very dangerous for investors.
Concluding Thoughts
Ethical investing can be a daunting prospect for many people. There are so many ethical considerations, and it can seem overwhelming to try to take all of them into account when deciding on an investment.
But it doesn’t have to be that complicated. When you invest ethically, you are simply choosing companies whose values align with your own.
One of the most important aspects of ethical investing is transparency. Anyone can claim they’re green, but if they aren’t open about their practices, they may simply pay lip service to the environment.
If you want to know how ethical a company is, look at what they report and see if it lines up with what they say in their press releases and on their website.