Greenwashing in environmental, social, and (corporate) governance (ESG) investing involves more than misrepresentation or false statements. ESG greenwashing is an investing pitfall resulting from an investment or product/service being marketed deliberately or accidentally in a misleading manner.

While there are investments that are actually environmentally and socially ethical, some are only greenwashing, claiming they're sustainable so they could capitalize on the demand.

If you're interested in putting your investment dollars into some ESG assets, here's what you need to know about greenwashing.

ESG Greenwashing Explained

In ESG investing, greenwashing happens when a security or product is described as more eco-friendly than it really is. It is a poor practice involving a company making money from the demand it created through misleading claims about the sustainability of its products and services or investment.

Instead of actually supporting efforts to fight climate change, some companies and funds are only taking advantage of a popular trend, using it mainly for marketing and public relations (PR) purposes.

Still, some investments are really more environmentally sound than others. So if you're looking to invest in sustainable assets and make a positive impact, it's essential to do your own research rather than believe what the companies say.

Identifying Greenwashing

Owning ESG investments can be slightly tricky due to the lack of regulation or precise definition that identifies a security or product as sustainable. You will have to rely on your own assessment to see if the company or investment is exerting real effort to adopt sustainability.

If you're considering choosing an ESG fund, it's important to examine the fund's key investments to determine whether the portfolio is created ethically or it's only one of those that took out some unfavorable assets.

Reviewing the prospectus can also help you find out about the fund's objective and if it aligns with your values. For example, the ESG fund is built on the idea of cutting greenhouse gas emissions or expanding the board diversity of the companies included in it.

Consider Investing Directly Instead

Perhaps the best approach to owning ESG investments is directly purchasing stocks of companies with moral undertakings and culture and history supporting those details with data.

As an ESG investor, your goal is not to invest in companies that say they are businesses with environmentally and socially ethical values. Rather, you should put money into ones that can demonstrate how they are backing the cause.

Factors to Consider in Direct ESG Investing

There are a few factors you need to consider when you choose to invest directly in a company, instead of through a fund, for ESG reasons:

- Proof to Support ESG Claims

Find solid proof the company uses to back its ESG claims. For example, the company made certain details public about its plans to achieve net-zero emissions.

In addition, check if the company is utilizing reliable data-gathering tactics, like the Greenhouse Gas Protocol (GHG), to collect emissions-related information.

- Data Limitations

Information on ESG is still developing, which creates some limitations on gathering data. Therefore, it's crucial to confirm whether the company has reported its data limitations and ESG performance.

- Transparency of ESG Information

Try to determine whether the company's ESG information is transparent and presents the complete picture or only focuses on the most interesting details and makes light of other important topics.