If you have not heard about in the ESG sector investing, you’re missing out. The growth of ESG-focused investment funds in the last few years has been tremendous. In 2021, a staggering $649 billion was poured into these funds, up from $542 billion in 2020 and $285 the year before that.
So, what exactly is ESG investing? – the ESG Sector
ESG is an acronym that stands for Environmental, Social, and Governance. It is essentially an investing strategy where investors put their money into companies and funds whose policies and practices are sustainable and intended to make the world better.
Using this approach, you invest in organizations that score highly on environmental, societal, and corporate governance responsibility scales as determined by a reputable third party- usually a research body or independent firm.
As good as ESG investing sounds, it faces a unique, genuine risk of greenwashing.
By definition, greenwashing uses “sustainability” to market a brand or its offerings without actually doing anything to become environmentally sustainable. So, as an investor, you are lied to about a company being green when it is not.
So, how can you avoid falling into the greenwashing trap? Here are the most common signs that an investment company is greenwashing:
1. Vague, and Often, Outright Misleading Wording
“We are a green investment company.”
“We are all about eco-friendly investing.”
If these are the terms that describe the company without actual concrete material to accompany them, you are probably being greenwashed. Using vague terms to sound environmentally or socially sustainable is, in fact, quite common.
But you can tell a lie or misleading term from a mile away by just looking a little deeper. Is there any other information talking about this green initiative? Any certification or proof? A company that is misleading you will have nothing to back its claim.
2. ESG Investing is Just One of the Many Offerings
Is the company all about ESG, or is this just one of its many portfolio offerings? If it is the latter, the likelihood of greenwashing is relatively high.
A company cannot say it promotes ethical investing when it does conventional-style support. It is like getting energy-efficient light bulbs for your home and buying single-use bottled water every day. One action contradicts the other.
The company is telling you that they have sustainable companies for the likes of you who are concerned about ESG practices and bad companies for everyone else.
3. A Best-in-Class Approach for Rating Green Investments – the ESG Sector
Ever been in the grocery store and wanted to get a fresh fruit but could not find one, so you chose one that was least “aged”? That is what a best-in-class means- better compared to everything else in the category.
Why is this approach considered greenwashing?
When you evaluate a company using this method, you do not consider how ethical they are but rather how they compare with others in the industry. So, in an industry with few sustainability practices, a neglectful company can have a perfect rating.
4. The Company Lets You Pick Whatever You Want
Another thing that gives away a greenwashing company is the “have it your way” approach. It happens when a company hands over the responsibility of picking sustainable companies to you, the client.
While this way can work if you are well informed, more often than not, you do not have time or expertise to do all the research on each company before adding it to your portfolio. At most, you may just check issues close to your heart or whatever comes to mind and fail to assess everything else.
So, instead of helping investors make good ethical investment decisions, these companies pass out the responsibility of research to the investor.
5. An “Exclude Known Vice Industries” Approach
You can also tell if a company is greenwashing if it is using exclusion tactics in its quest to appear “green.” In this case, the company goes to lengths to distance itself from companies traditionally deemed to be “sin stocks.” For example, brands deal with tobacco, alcohol, weapons, gambling, and adult entertainment.
Simply excluding the destructive industries does not cut it when picking green companies. Lots of seemingly good companies can have unethical practices too. Instead, your investment firm should employ a strategy that identifies environmentally and socially ethical companies.
6. Green Offerings while the Company is Dirty
A company can come bearing the suitable offerings woe you and pass itself as a green and sustainable venture. So, it is essential to look at the entire picture of the company to know for sure.
For instance, an investment firm can promise to create a portfolio of only those companies that have high environmental, social, and governance ratings but have social or governance issues of their own. If so, you might just be getting greenwashed.
7. Investments with Hidden Trade-Offs- the ESG Sector
Another thing that points to greenwashing is the sin of the hidden trade-off. In this case, a company claims to be green based on a shortlist of attributes while deliberately hiding the essential environmental issues it causes.
A great example here is the Fiji Water company’s claim that its plastic water bottles are carbon negative when that is so far from the truth.
8. Irrelevant Environmental Claims
Last but not least, you can tell a company is greenwashing if its claims are irrelevant. And what does that mean?
A brand is making a genuine environmental claim, but it does not hold any actual water for what the customers deem to be environmentally preferable. Think of it as saying something true, but it does not address your concerns.
A great example here is a company promoting its recent investments in renewable energy, yet that only accounts for a small part of the company’s budget.
Ready to Invest with Companies That Are True ESG Standards? Do Not Be Fooled with Greenwashing
There you have it. The top ways to detect when a company is greenwashing, so you do not fall victim to its deception. Most importantly, do not be afraid to ask the right questions. To ensure your dream of making the world greener and more sustainable comes true, invest in companies with open, high ESG standards.
