June 14, 2024

Ethical Investing 101: Understanding How Greenwashing Works

3 min read

Greenwashing occurs when claims of sustainability, either by a company, firm, or a portfolio of businesses, are portrayed to be more evident or profound than they are. Since public interest in green energy and eco-friendly practices have significantly increased, investment firms are rushing to meet these demands. To profit, some investment firms aren’t researching enough to confirm that sustainability claims are valid. 

By creating misleading portfolios, the public and all stakeholders are deceived by these greenwashing practices. The most genuine ethical portfolio will entirely avoid methods that consider only some factors of sustainability. Ultimately, the time and resources devoted to understanding the human impact will suffice in proving that greenwashing is not taking place. 

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Unfortunately, greenwashing is an ongoing problem. Thankfully, there are signs to look out for that can make spotting it within an investment firm, company, or portfolio relatively easy. Continue reading for more information on greenwashing and its negative contributions to humankind

How Greenwashing Works 

Compromised Investment Firms: Choosing Sustainability When It Suits The Conditions For Profit 

Greenwashing is likely if your firm uses multiple types of investing aside from ethical investing. The firm’s authenticity is compromised because they act differently depending on the companies and the presented propositions.

Best In Class Approaches Glorify Appearance 

The “best–in–class” approaches focus on appearance rather than social responsibility. In other words, the best company could be chosen in a particular realm, but this could also pertain to other qualities and not necessarily be exclusive to sustainability. Firms willing to work with tobacco companies may choose those that are best in class; therefore, best in class does not necessarily align with sustainability for humankind. 

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Exclusions Are Not Humankind Investments 

If your portfolio contains exclusion rule attempts, while this may be well intended, it is not the most effective way to ensure that greenwashing is not taking place. The exclusion rule is an older approach that attempts to create socially responsible portfolios by weeding out the good from the bad companies. 

All problematic companies, such as alcohol, gambling, tobacco companies, etc., are excluded. While this leaves room for sustainable companies, that does not mean such companies will be selected, or that those claiming to be sustainable, are the best for humankind. 

When Investors Run The Show 

An investor can have well-meaning intentions but lack the skills to understand the sustainability factors involved, resulting in significant adverse outcomes for humankind. Investors that attempt to create sustainable strategies may not have taken all the necessary steps and research to back up their decisions. Investment firms that give their investors more freedom in this way, are potentially setting themselves up for greenwashing.

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Greenwashing Wears Many Faces 

As you can see, greenwashing does not always have to be intentional or manipulative. In many cases, well-meaning professionals attempt to get involved with ethical investing but lack the skills and tools to do so correctly. Likewise, some companies deliberately go out of their way to deceive the public of what they value and represent for humankind.

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