Key takeaways:

• Greenwashing is a growing concern in the space of ESG investing

• Third-party environmental ratings offer independent insight regarding a company’s commitment towards sustainability initiatives

• A sound knowledge of industry standards and benchmarking a company’s environmental claims and progress can help you avoid greenwashing

• Businesses that work with and engage with shareholders to boost their ESG credentials may provide investors with some reassurances about that company’s genuine intentions

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As environmental issues become a bigger focal point for society at large, many investors are also turning their attention towards companies that strive towards setting an example when it comes to sustainability and environmental practices.

However, coinciding with the rise in ESG investing, greenwashing has emerged as a relatively recent phenomenon. It refers to the tendency of a company to misrepresent, overstate, or provide dishonest information about their commitment to environmental causes. This is done in an effort to win support from prospective investors, clients, or customers.

Why should you be concerned about greenwashing?

Ultimately, greenwashing is a dishonest practice that misleads individuals about the true environmental impact of a company and its products or services. In turn, this may lead to a situation where investors, clients, or consumers make decisions that are detrimental to the environment.

Furthermore, greenwashing also erodes trust in ESG investing, making it harder for individuals to identify and support businesses that are honest in their intentions to better the environment.

Here are four tips to help you shield your investment portfolio from greenwashing.

1. Review Environmental Ratings

If you’re relatively new to ESG investing altogether, one of the more beneficial approaches you may wish to adopt is to look at assessments conducted by third parties.

There are a number of companies that have developed a reputation for analysing a company’s ESG practices, including its commitment to environmental practices.

You may wish to use these assessments as part of your due diligence. They will typically include detailed information on a company’s operations, and how they conform, or don’t conform with accepted ESG practices and what the company has stated as its goals in certain areas.

In some cases, you may wish to speak to investment professionals, including licensed financial advisors who specialise in ESG investing. They may be able to help you hone your focus on investments that not only meet your broader objectives, but which also meet environmental criteria.

Selfwealth offers an ESG rating tool developed in partnership with Refinitiv.

2. Benchmark Environmental Claims and Progress

If you’re more inclined to dig deeper on your own, then you can dive under the hood by gauging a company’s track record when it comes to meeting environmental commitments and targets.

Of course, you might be wondering how you benchmark such progress? But that shouldn’t be too complicated, because the company will have environmental policies and sustainability reports that effectively lay out its ambitions and targets.

From there, it’s a matter of cutting through the marketing fluff and focusing on tangible results, including a company’s energy consumption, waste management practices, certification awards, carbon footprint, as well as any other metrics that shed light on progress towards achieving its stated environmental goals.

And on that front, there is also a question that investors can ask themselves – are the company’s goals and objectives strong enough? 

Given the scrutiny that comes with being a publicly-listed company, some businesses have a strong track record as far as sustainability initiatives. They may also be recognised by environmental groups for their demonstrated commitments to reduce their environmental impact. The same can be said for companies with poor records, making it easier to avoid greenwashing.

3. Understand Industry Standards

Not every industry is the same. For ESG investors particularly conscious of the environment, this naturally makes some areas a little easier to invest in, and others completely off limits.

But understanding industry differences is also key to holding companies against a standard of sorts. What is standard industry practice may be acceptable for consideration of investment, but identifying industry-leading companies boasting the most comprehensive sustainability practices is more likely to build a case about genuine commitment as opposed to greenwashing tactics.

Regulations also play a key role when it comes to different industries, and with this in mind, it is beneficial to understand how these might impact your portfolio.

The unfolding dynamics across certain industries may also make certain industries more susceptible to greenwashing practices compared with others, which could encourage investors to focus their attention elsewhere. 

Changes in regulations, market trends, or even technology for that matter, each have a pivotal role in terms of environmental compliance. Investors may be well served to stay informed about any changes in order to identify genuine efforts for environmental leadership.

4. Company Engagement and Activism

Oftentimes, investors see ESG leadership in effect when a company takes on board shareholder feedback and incorporates appropriate concerns and worries into their practices.

Shareholders are effectively part-owners of a company, so it follows that leadership, whether it be management or the Board of a business, should be listening to shareholders. After all, shareholders are given voting rights over key matters, while also in a position to put forward questions and push for more rigorous policies and actions when it comes to environmental practices.

Shareholder activism is a growing area of activity, and when it comes to ESG principles, it has led to massive changes in the corporate realm over recent years. Various shareholder campaigns have pushed companies to embrace more ambitious carbon emissions goals, among other matters.

Ultimately, companies that are prepared to entertain such proposals, or at the very least engage in dialogue around these proposals, are less likely to be associated with greenwashing. Of course, that is not to say that businesses that push back against certain proposals are committing greenwashing, as there may be a number of valid commercial or operational reasons for said reluctance.

But when it comes to pushing for change, transparency, and genuine efforts to meet sustainability goals, companies with direct shareholder engagement are generally more likely to be aligned with ESG investors.