Greenwashing is when a company markets itself as more environmentally friendly than it actually is. Also known as “green sheen,” this tactic is used to attract consumers who prefer products with high environmental standards.
The term greenwashing is taken from whitewashing, which is when a company or individual conceals its wrongdoings by presenting a cleaned-up version of their actions that isn’t actually true.
A typical reason companies engage in greenwashing these days is that consumers want to purchase the most sustainable products they can. According to GreenPrint’s 2021 Business of Sustainability Index, 75% of millennials and 64% of Gen X consumers claimed they would spend more money on a more environmentally friendly product.
Before you buy products marketed as sustainable or eco-friendly, or invest in a green company that makes similar claims, it may help to know some of the red flags of greenwashing.
Identifying the Different Types of Greenwashing
There are a few common marketing tactics that constitute greenwashing. Many of these can be convincing, so in order to decide whether a company is engaging in actual greenwashing or not, you may have to do your own research.
Here are some red flags to look out for when purchasing a product, or investing in a company that claims to embrace sustainability or ESG investing (i.e. good environmental, social, and governance practices):
• Vague terminology: Labels such as “eco-conscious,” “clean,” or “100% sustainable” don’t actually mean anything in terms of a company’s manufacturing processes or adherence to environmental policies. Be sure to research terms and standards that reflect actual environmental practices.
• Imagery: If a polluting company uses marketing images of flowers, trees, beaches and so forth, they may be trying to appear more environmentally friendly than they really are. Be sure to check whether the product lives up to the advertising.
• Greenwashing a traditionally polluting product: Companies may attempt to improve the branding of a product by making it seem more environmentally friendly without actually changing much or anything about it.
• False associations: Brands can make it seem like they are endorsed by a third party when they really aren’t, or the third party is simply their own subsidiary.
• Green products from a polluting company: A company might make a product that has a lower environmental impact, such as an electric vehicle, but manufacture it in a way that creates significant waste and greenhouse gas emissions.
• Fabricated data: Companies might fund research that will have results that make them look better, or make data up completely.
Again, because socially responsible investing has grown so rapidly, and many companies want to attract the attention of investors and consumers, there is a commensurate growth on the greenwashing side, so it does pay to be cautious when making choices.
Example of Greenwashing
A few examples of what would be considered greenwashing are described on the U.S. Federal Trade Commission (FTC) website:
• A company labels a trash bag they are selling as “recyclable.” Although this may be true, it’s unlikely that a trash bag full of trash will be emptied and then recycled on its own. This label makes the product appear to have an environmental benefit, but in reality it doesn’t.
• In another example, a company labels a product as having 50% more recycled content than a previous product did. This makes it sound like a significant amount, but in fact the company may have increased the recycled content from 2% to only 3%, so there has been hardly any change in reality.
• A company labels a product as “recyclable” but they don’t say specifically whether all parts of it are recyclable, just some parts, or just the packaging.
Other real-world examples include: an oil company that’s known for environmental negligence releasing advertisements that state their dedication to the environment — or companies promising to do environmental cleanups, but failing to actually follow through on those promises. You can compare these to alternative or solar energy companies that are making a difference.
💡 Recommended: A Beginner’s Guide to Invest in Solar Energy
The Negative Effect of Greenwashing on a Company
Although in the short term greenwashing can benefit a company if it leads to more people buying their products, there can be negative consequences. If consumers realize the company is engaging in greenwashing there can be a big PR backlash. Companies can also face legal ramifications for their misleading claims. And investors interested in true impact investing may take their business elsewhere.
In the long term, the biggest negative consequence is the actual environmental impact of manufacturing practices that are not, in fact, green or sustainable. Companies rely on clean water and air, quality soil, and a stable climate to operate. A thriving economy requires a healthy planet, and greenwashing ultimately doesn’t support either.
How to Avoid Greenwashing
Whether purchasing products or investing in companies, if you are looking for the most sustainable options, there are a few ways to avoid greenwashing.
1. Clear and Transparent Language
Watch out for vague terms and language. If a brand makes sustainability claims, look for specifics such as certifications, verifiable third-party endorsements, industry credentials, and details about exactly what the brand is doing.
2. Evaluate the Data
If a brand uses statistics and numbers to back up its sustainability claims, make sure they are backed up with credible data.
3. Compare Similar Products
A company may make sustainability claims when in fact their product has basically the same environmental impact as their competitor’s. Compare ingredients, packaging, and manufacturing information to see whether one product is really better than another.
4. Look Beyond the Final Product
Even if a company is improving the impact of its products, it may not be addressing the waste and emissions associated with its operations. If this is the case, they may be just making changes for marketing purposes. Check out their website and other materials to see how much effort is going into sustainability at the corporate level.
5. Look for Goals and Timelines
If a company is truly implementing a comprehensive sustainability plan, it would include measurable goals and timelines. Ideally those are shared with consumers at least to some extent.
6. Check Ingredients and Materials
Some terminology and product labels can be misleading. For instance, a company might say that their product is made from organic cotton or recycled plastic, when in fact only a small percentage of the cotton or plastic is organic or recycled and the rest is not. The FDA has no guidelines for what the term “natural” means, and according to the USDA the term simply means that a product is “minimally processed” with “no artificial ingredients.”
Greenwashing vs Green Marketing
There is nothing wrong with a company telling the story of its environmental initiatives and the steps it is taking to produce products more sustainably. That’s green marketing at its best and most transparent. By contrast, greenwashing is when a company attempts to cover up their bad practices using fake versions of legitimate claims.
Actual green marketing may include:
• Certifications and endorsements from established regulatory organizations
• Clearly labeled manufacturing processes
• Recyclable, compostable, or biodegradable materials (but watch out for these labels, sometimes a product can actually only be composted or biodegrade in very specific conditions that aren’t realistic).
• Products free from toxic chemicals
• Use of renewable energy
• Transportation measures such as EVs
• Purchase of carbon offsets for any unavoidable emissions
• In-office programs and measures such as renewable energy, LEED certified buildings, on-site composting, or elimination of single use plastic
• Doesn’t use too much packaging, and ideally avoids plastic packaging
• Circularity programs that allow consumers to send back the product for repair or reuse
• High-quality manufacturing made to last rather than one-time or short-term use
• Fair trade and ethical labor practices
• Environmental programs outside the company, such as donations or volunteer efforts
The Takeaway
Greenwashing is a marketing tactic some companies use to align themselves with the growing consumer and investor desire for sustainable products and investments. It’s related to the concept of “whitewashing,” which means covering up the truth with a positive-sounding story.
Greenwashing can take a number of different forms, including imagery that appears eco-friendly (but doesn’t reflect anything about the actual product), advertising and marketing language that is misleading, or the greenwashing of traditional pollutants (e.g. fossil fuels and the like).
If you’re looking to make socially and environmentally conscious investments, hopefully the tips above will help you avoid companies that use greenwashing. One way to help you avoid greenwashing as you incorporate green companies in your portfolio is to invest in an ESG-focused exchange-traded fund (ETF), like the SoFi Smart Energy ETF (ENRG). These ETFs give investors exposure to a wide range of companies that support positive environmental outcomes without green sheen, which may help you make an impact and reach your long-term financial goals.
FAQ
What is ESG greenwashing?
ESG greenwashing is the practice of using marketing tactics to exaggerate sustainability efforts in order to attract customers, employees, investors, or positive media attention.
What are the three most common kinds of greenwashing?
Three common types of greenwashing are the use of environmental imagery, misleading labels and language, and hidden tradeoffs where the company emphasizes one sustainable aspect of a product but they also engage in environmentally damaging practices.
Photo credit: iStock/fizkes
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus. A prospectus may be obtained by visiting sofi.com/invest/etfs. Please read the prospectus carefully before you invest.
Fund Risks: An investment in the Fund is subject to numerous risks including the possible loss of principal. There can be no assurance that the Fund will achieve its investment objective. Equity securities, such as common stocks, are subject to market, economic and business risks that may cause their prices to fluctuate. As with all ETFs, Fund shares may be bought and sold in the secondary market at market prices. The market price normally should approximate the Fund’s net asset value per share (NAV), but the market price sometimes may be higher or lower than the NAV. The Fund is new with a limited operating history. There are a limited number of financial institutions authorized to buy and sell shares directly with the Fund, and there may be a limited number of other liquidity providers in the marketplace. There is no assurance that Fund shares will trade at any volume, or at all, on any stock exchange. Low trading activity may result in shares trading at a material discount to NAV. Please see the prospectus and summary prospectus for a complete description of principal risks. Models and Data Risk: The composition of the Index is heavily dependent on proprietary quantitative models as well as information and data supplied by third parties (“Models and Data”). Non-Diversification Risk: Because the Fund is “non diversified”, it may invest a greater percentage of its assets in the securities of a single issuer or a smaller number of issuers than if it was a diversified fund.
The Fund’s investments will be concentrated in an industry or group of industries to the extent the Index is so concentrated. In such event, the value of Shares may rise and fall more than the value of shares that invest in securities of companies in a broader range of industries. Investments in securities or other instruments of foreign securities involve certain risks not involved in domestic investments and may experience more rapid and extreme changes in value than investments in securities of U.S. companies. Distributed Energy Companies typically face intense competition, short product lifecycles and potentially rapid product obsolescence. These companies may be significantly affected by fluctuations in energy prices and in the supply and demand of renewable energy, tax incentives, subsidies and other governmental regulations and policies.
The fund is distributed by Foreside Fund Services, LLC.
SOIN0522005
