Investment Institute

Five greenwashing red flags and how to spot them

  • 14 September 2022 (5 min read)

By recognizing common greenwashing red flags, investors can make better investment decisions for their portfolios, communities, and the world.

Greenwashing — or when a company portrays itself as environmentally conscious despite a lack of sustainability efforts — is rising, but it’s not a new phenomenon. The term was coined in the late 1980s by environmentalist Jay Westerveld. Now, nearly forty years later, it remains relevant as greenwashing seeps into every industry from hospitality and retail to automotive and financial services.

The growth of conscious consumerism is one of the biggest drivers behind recent spikes in greenwashing. Today’s consumers are more invested in sustainability and environmental concerns and expect companies to reflect that commitment. In fact, a collaborative study between Visual GPS and YouGov found that 81 percent of respondents expected companies to be environmentally conscious in their advertising and communications.1 Also, a recent, global study from IBM found that over 40 percent of respondents surveyed are purpose-driven consumers who select companies based on how well they align with their personal beliefs.2 This signals to more conventional financial companies and regulators that they stand to profit by adhering to, or appearing to adhere to, ESG principles.

In 2021, ESG fund assets in the United States skyrocketed to a record $400 billion3 , up 33% from the previous year. The issue is that many companies aren’t being truthful about the reality of their ESG commitments. When Columbia University and the London School of Economics compared the sustainability record of U.S. companies in ESG fund portfolios to that of non-ESG portfolios, they found the ESG funds had worse track records for compliance with labor and environmental laws than their non-ESG counterparts.4

Statistics like this are a bit disheartening, but investors can ensure they invest with companies that are genuinely committed to sustainability by keeping an eye out for common signs of greenwashing. Here’s what you need to know.

Five ways to spot organizations that greenwash

Responsible investments can make a significant impact, and with issues such as climate change escalating by the day, it’s never been more important to act. What can investors do to avoid investing with a company that overstates its eco-consciousness? By being mindful of a few common signs of greenwashing, investors can identify funds that align with ESG principles and make better investment decisions.

1. Use of ambiguous language:

It’s easy for some companies to declare themselves “environmentally friendly” or “sustainable” without engaging in practices that support those claims. Be wary of issuers that may be touting their funds are “green” without presenting further evidence or data to substantiate their statements.

2. Lack of visible reporting:

Full transparency is fundamental to understanding a fund’s alignment with ESG measures. If an issuer withholds or presents insufficient data regarding their actions on sustainability or social issues, it is impossible to know how the risks involved in investing with a company that isn’t actually environmentally conscious.

3. Wavering commitments:

Is a firm investing in green initiatives because they want to drive change, or are they chasing trends? Green bonds can underperform in the short-term compared to their conventional counterparts (though there are reasons to be optimistic), which may cause some investors to sell their funds in a panic. When searching for an issuer, check to see that they’re committed to ESG for the long haul.

4. Poor reputation or controversies:

Even if a company has earned a “good” ESG score from a rating agency, it can still pose a risk to responsible investors. While an ESG rating is a great starting point, an investor’s commitment to these principles should not be contingent on this factor alone. Looking into a company’s reputation and past actions can help investors look beyond an ESG score to determine what a company really stands for.

5. Oversimplifying issues:

From supporting a low-carbon economy and clean tech to serving underrepresented communities and providing access to affordable housing, ESG is a broad category that covers a variety of issues. If a company is simply “going green,” it’s only scratching the surface. By oversimplifying these issues, company stakeholders may be showing their lack of engagement with the cause, and it is a red flag that might prompt responsible investors to look elsewhere.

ESG: The real deal

Although there are some bad actors, we must remember that there are many more out there who are making a genuine effort to address climate change and other socioeconomic issues. While greenwashing is a surface-level attempt to gain the favor of responsible investors without actually putting in the legwork, ESG investing is a firm, intentional commitment to better our world by supporting those who are taking the actions to do so.

As sustainable investing grows, more regulatory bodies are taking a stand against existing systems that have enabled greenwashing to become so pervasive. The SEC recently approved two proposals5 to enhance the scrutiny of ESG funds and advisers’ ESG practices, putting more pressure on companies labeled as ESG-focused to report their data accurately, transparently, and consistently.

At AXA IM, we’ve demonstrated our commitment to responsible investing and ESG principles since 1994. Through our proprietary green bond assessment framework, we determine an issuance’s greenwashing risk, if its sustainability strategy is credible, and if the project will benefit the environment. Even if a company has received a positive ESG score, we look more closely to ensure we invest in only the highest quality, most impactful projects.

Our framework utilizes a four-pillar system to determine whether an investment meets our and our clients' principles. These pillars are:

  • Sustainability strategy: Does the green bond suit the issuer’s environmental goals?
  • Project type: Will the project have any measurable impact?
  • Proceed management: Are we confident the proceeds are financing the intended project areas?
  • Impact reporting: Will the issuer track long-term performance and provide transparent reporting of the project’s impact?

Make a sustainable, measurable impact with AXA IM.

At AXA IM, ESG-focused investing isn’t just a trend — it’s a mission. We never greenwash, and we’re committed to helping our clients go beyond avoiding assets that simply manage risks rather than proactively counter them.

Investments involve risks, including the loss of capital.

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