Understanding Greenwashing and How to Avoid It

What is greenwashing

At its core, greenwashing is a form of deception — a way of misrepresenting products or practices to appear more environmentally or socially responsible to appeal to ethically minded individuals. It can take many forms, including: 

• Overstating positive environmental or social impacts
• Highlighting minor sustainability efforts to distract from harmful practices
• Avoiding disclosure of sustainability goals and performance

The European Securities and Markets Authority (ESMA) defines greenwashing as:

“A practice whereby sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services.”

Greenwashing is a growing concern for regulators around the world and efforts to curb the practice have been extensive, particularly in Europe. New laws are being introduced and existing regulations strengthened to ensure that sustainable claims are accurate, verifiable and transparent. These regulatory actions aim to reinforce trust in sustainable markets, and protect consumers and investors. 

Why greenwashing matters to investors 

To some, greenwashing might seem like a harmless marketing tactic  — just a bit of embellishment here and there. But in reality, it is a misleading practice that has serious consequences. Misrepresenting environmental and social efforts raises ethical concerns and erodes trust in the broader sustainable investing industry. As a result, genuinely responsible companies may be unfairly dismissed and all ESG efforts viewed with skepticism. Moreover, greenwashing obscures the urgent truth that far more needs to be done to address pressing environmental and societal challenges.

Beyond the ethical implications, greenwashing also introduces significant financial risks. When a company or a fund falls short of its promised ESG performance, they may face reputational damage, regulatory penalties and investor backlash. In fact, several high-profile cases have demonstrated how greenwashing can lead to plummeting stock prices, loss of credibility, and substantial fines.

• in 2015, Volkswagen was in the center of a major scandal, widely known as "Dieselgate," after it was revealed that the company had promoted its diesel vehicles as environmentally friendly while secretly installing software designed to cheat emissions tests under certain conditions. The company stock price went down by nearly 30% within days and Volkswagen had to pay over USD 30 billion globally to cover fines and legal settlements, including USD 4.3 billion in the US alone.
  
  
• in 2021, DWS, the asset management arm of Deutsche Bank was accused of overstating the extent to which ESG factors were integrated into its investment processes. As a result, the stock price fell by over 13% in a single day, the CEO resigned and DWS was fined USD 19 million by the US regulators and an additional USD 25 million by German authorities. 

How to spot and avoid greenwashing