Greenwashing is an increasing problem for ethical investing, but what exactly is it, and how does it work? Here’s what you should know.
What Is Greenwashing?
Greenwashing (also spelled green washing) is a largely-modern concept affecting investing and corporate-level marketing.
Greenwashing Definition
At its root, greenwashing companies are those that either lie or create false impressions about how environmentally-sustainable their practices are. Today, the core greenwashing meaning focuses on advertising, but some companies may attempt to greenwash things internally and prevent employees from realizing what they’re doing.
How Greenwashing Works
What does greenwashing mean in the real world? In most cases, companies green wash to become more appealing to environmentally-conscious investors and customers.
For example, a company may declare that it will use recycled materials for its products. If only 1% of the product uses recycled materials, they’re not using a meaningful amount. However, they’re still trying to get the public relations benefit of saying they’re using recycled materials.
How Does Corporate Social Responsibility (CSR) Relate to Greenwashing?
Greenwashing is essentially a refusal to adhere to the principles of corporate social responsibility, which are sustainability, accountability, and transparency. A company that lies or misleads others about its actions to hide unsustainable practices violates all three principles.
Impacts of Greenwashing Companies
Companies that greenwash tend to have significant impacts in their areas of operation. Just as hiding corruption can lead to a company failing and investors losing money, working to define greenwashing makes it clear that companies can do significant long-term harm by it. We’ll look at examples in a moment, but first, we need to know how to recognize this.
How to Spot Companies That Greenwash
Five signs stand out more than anything else when companies attempt to greenwash things.
1. False and/or Vague Language
Demonstrable lies and vague statements about activities can indicate greenwashing. For example, a company that says it’s committed to sustainable practices but never explains what they are probably isn’t doing enough to matter. On the other hand, companies confident in their activities are happy to prove what they’re saying is true.
2. Hidden/Incomplete Information
It can be hard to separate vague language from hidden information, but they tend to operate together. Companies that deliberately hide information when investors ask for it usually have a reason that often doesn’t look good for them.
3. Carbon Offsetting vs. Emission Reduction
Carbon offsetting is not a particularly effective method for dealing with environmental issues, whereas significant emission reduction has a real and immediate impact. Companies that only do things with supposed future benefits may be trying to greenwash their current behaviors.
4. Company Ownership
Company owners can be hard to untangle at times. Still, some businesses may offload all of the bad stuff to a faceless parent company while proclaiming they only do good for the environment. Therefore, it’s important to evaluate a company’s parents, not just its own activities.
5. Responsible Packaging
Environmentally-conscious packaging is a good sign for companies. If they’re not trying to minimize packaging and avoid waste, they’re probably greenwashing despite claiming they’re eco-friendly.
Examples of Greenwashing Companies
Greenwashing is common in some industries, but it’s commonplace in areas dealing with physical products. For example, Volkswagen famously equipped vehicles with sensors to detect emissions tests and change the vehicle’s behavior, obscuring that they were emitting dozens of times more pollutants than allowed.
Similarly, Amazon has advertised things as eco-friendly for having minimal packaging, even when the product itself is actively damaging. But, again, that goes against both the letter and the spirit of genuinely eco-friendly marks.
Why Do Companies Engage in Greenwashing or Overstate Their Claims About Being Socially Responsible?
When you look at the corporate level, what is greenwashing? In most cases, greenwashing companies pursue profit and want to keep making money, regardless of the cost to the environment.
It’s important to remember here that greenwashing is an active process by a company in which they are deliberately hiding the truth about their activities for a perceived benefit. For example, Exxon knew about climate change for decades and actively misled people about it, knowing that it would be a blow to their company if they didn’t.
If they’d chosen a different route, the world might look very different today.
Not every company operates at the same scale as Exxon. As a result, smaller businesses may want to increase their profits without having the funds to invest in eco-friendly changes to their business model.
Ultimately, most businesses are profit-oriented, and we can reasonably assume that they will continue greenwashing unless forced to stop.
How to Avoid Greenwashing
There are several ways to avoid greenwashing.
The first and most apparent is researching companies before investing in them. This means asking specific questions about what they’re doing to help the environment and scanning their answers for any ambiguities or omissions.
Investors can also minimize greenwashing by presenting demands to companies. For example, making sizable investments conditional on independent examination and verification of eco-friendly processes can help the current greenwashing, changing from an existing problem to a past one.
Even without these measures, investors can make a difference by blacklisting companies, and publicly so, when they greenwash.
What Can We Do About Greenwashing?
The most effective way to deal with it is by using financial incentives to stop companies from doing it. Greenwashing is essentially an attempt to manage public relations and profit from doing so. If the risk of greenwashing outweighs the reward, most companies will be far more hesitant to start doing it.
However, this is not as effective unless investors are loud and public about the issue. Even without investing in a business, directly contacting them and letting them know they lost out on investment because of specific greenwashing behaviors can motivate them to start changing. This is even more effective if multiple investors do so in sequence.
Savvy investors can focus on companies that are more in need of financial support and, therefore, more susceptible to economic pressures. Changing internal company rules to prevent greenwashing and ensure independent verification of their claims is an effective strategy.
Green Marketing vs. Greenwashing: What’s the Difference?
Green marketing is what greenwashing companies should be doing.
While both are forms of advertising, green marketing differs from greenwashing by clearly and directly saying what a company is doing to help the environment. The best green marketing clearly shows how a company’s activities aren’t just carbon-neutral but actively carbon-negative and doing more good than harm.
Many companies don’t like talking about how cost-efficient it is to help the planet at scale. However, any demonstrably carbon-neutral company can often become carbon-negative with almost no increase in cost or effort. In other words, companies that remain carbon-neutral are just saying that they only want to do the bare minimum.
Green marketing is specific, provides all the information people need, and shows reduction of emissions as a primary goal. Greenwashing pretends it’s all of these but falls apart under scrutiny.
Ultimately, greenwashing only works when people aren’t paying attention and take things at face value. A little digging is all it takes to expose this problem.
Final Thoughts
Ultimately, greenwashing is the antithesis of socially conscious investors. It’s a direct attempt to take advantage of investors and customers trying to be thoughtful and responsible with their money. Greenwashing causes actual harm to both people and the world we live in, so a firm and public response is the best way to address it.
Want to stay afloat of all things socially conscious investing? Follow our Facebook page or sign up for our newsletter to keep in the loop. We aim for high quality content that helps conscious investors make sounds choices that also honor their views on impact.
We offer complimentary financial counseling consultations. Just click here to start.
Pingback: Net Zero: Financial Planner Explains Investing Toward Decarbonization