Large companies have a huge incentive to go green. There’s not just saving the planet and our delicate ecosystem to consider—no, that’s just a side effect. The real benefit of going green is that 68% of consumers actively seek to reduce their environmental impact by purchasing from sustainable brands.
The above, of course, is a very cynical argument to make, but it’s less cynical than the companies who have decided to gain consumer trust via the practice of greenwashing. In other words, these companies have outwardly pledged to do their part to reduce climate change effects—but apart from issuing a bunch of public statements, they’re just doing more of the same.
As an investor, you should have a strategy in place to identify and avoid greenwashing companies. These companies are essentially concealing risks to your portfolio—hiding how the changing climate poses a danger to their businesses and how their businesses threaten the climate.
How Can You Tell When a Company is Greenwashing?
There are two kinds of greenwashing—the kind that’s mostly used to mislead consumers and the kind that’s mostly used to fool investors (and regulators).
On the consumer side, recyclability and sustainability are two words the are often used to deceive. Let’s say that a company says that its product now contains 50% more recycled plastic. That may not technically be a lie, but it’s misleading if, for example, the company increased the recycled plastic percentage from 6% to 9%. That’s still not a significant percentage of recycled plastic.
Another common greenwashing tactic comes from hotels that ask you to reuse their towels to save water and save the environment. Reusing a towel might help you save water, but it turns out that hotels are a lot more interested in saving money on cleaning costs.
Again, these are fairly low-level strategies designed to mislead consumers—you’d hope and expect an investor to do more homework. Therefore, other companies deploy more sophisticated greenwashing strategies. One such strategy involves carbon offsets.
Why are Carbon Offsets a Red Flag for Greenwashing?
Carbon offsets look good on paper. You know that your business is unavoidably emitting some carbon right now. You hope to change this in the future by implementing new technologies and practices, but in the meantime, you want to help out by reducing or subtracting carbon emissions somewhere else. That’s a carbon offset—a measurable investment that can help negate the effect of your present-day carbon emissions.
A carbon offset might take the form of planting some trees, which will help sequestrate carbon out of the atmosphere. Alternatively, you might fund a green energy project, helping to build a solar power plant or a wind farm somewhere. You can even choose to invest in an electric car company, which was key to Tesla’s profitability back in 2020.
But there is a big downside to carbon offsets. On the one hand, purchasing these offsets can genuinely help the environment. On the other hand, you can’t beat the climate crisis by planting trees. If you don’t couple your ambitious purchase of carbon offsets with a genuine plan, then all you’re doing is kicking the can down the road. What’s more, if you won’t have an active and transparent oversight plan—i.e., making sure that all those carbon offset seedlings grow into trees and don’t just die in the ground—then your plan might be worse than useless.
Lawsuits and Regulators are Coming for the Greenwashers
Greenwashers are not a good investment. Terracycle, a company that’s been accused of being a front for greenwashing organizations, is now being sued for misleading consumers. Meanwhile, the SEC is proposing new ESG disclosure regulations that will force companies into the light regarding their environmental risks. The result is that more companies will have to put their money where their mouths are when it comes to fighting climate risks.
As an investor, you want to take these companies out of your portfolio before lawsuits or regulatory action occur—and that’s where Bitvore can help. Our new ESG dataset can help your company assess and mitigate environmental risks in your investments while directing resources towards organizations that are true to their environmental commitments.
