Greenwashing vs. Genuine Sustainability: How to Identify Truly Ethical Investments

Increasingly, both investors and consumers are looking to favour businesses that seek to protect and improve the natural world. The word ‘sustainability’ has gained a special kind of traction in recent years. So much so, in fact, that it’s being wielded by businesses whose actual activities aren’t quite as sustainable as their rhetoric might suggest. This practice of exaggerating a project’s sustainability is known as ‘greenwashing’.

But how can we distinguish genuinely green companies from the greenwashed ones? Let’s take a look.

Understanding the Rise of Ethical Investing and the Greenwashing Challenge

So, exactly what do we mean when we talk about greenwashing? There are few better examples than that of Volkswagen, which in 2009 launched a large marketing campaign to bolster the appeal of its ‘clean’ diesel engines. The company was later found by the U.S. Environmental Protection Agency to have cheated on its emissions tests, using special software designed to do exactly this.

The ensuing ‘Dieselgate’ scandal severely damaged the company, and led to legal and reputational damage that amounted to nearly $40 billion. The more that consumers and investors demand green products and services, the more inclined business might be to exaggerate their green credentials.

Delving Beyond the Marketing: Key Indicators of Genuine Commitment

So, what might we look for when attempting to distinguish green companies from greenwashed ones? The first step should be to disregard slogans and rhetoric. In some cases, we might also want to set aside photographs and video ‘documentaries’ – unless they are being produced by a genuinely impartial third party.

Investors should look for hidden trade-offs and compromises. Look at the totality of the company’s environmental impact, not just its most conspicuous achievements. Sometimes, a company might sacrifice their environmental performance in one area, only to make advances in another.

The Importance of Transparency and Reporting: Holding Firms Accountable

Investment companies should also be transparent about which companies they are investing in. A given financial product or portfolio might be clothed in green verbiage, but if the actual investments are not reported clearly and consistently, there’s no way for investors to truly know that their money is ultimately supporting green projects. This becomes increasingly difficult if the cash is being funnelled through holding companies. This is where the input of the right green-focused investor can be critical.

In the UK, the Financial Conduct Authority has recently tightened its requirements when it comes to sustainability disclosure, meaning that fund managers have a legal duty to disclose, as well as an ethical one.

Doing Your Own Due Diligence

External experts can perform a worthwhile service in sorting ESG investments according to their effectiveness. But if you’d like your spending to be truly green, you’ll also need to perform your own research as a consumer and an investor. Don’t take claims at face value: be sceptical at all times!