‘Investors’ Guide to Spotting Greenwashing

Sustainability claims are everywhere, but how many of them are true? How can investors avoid falling for greenwashing? Greenwashing refers to the act of misleading consumers about a company’s environmental practices or the sustainability of a product or service (Yang et al., 2020, p. 1487). This practice harms the environment, misleads consumers, and distorts the decisions of investors seeking to invest sustainably. Making misleading sustainability claims carries real and serious risks. A case in point is the $19 million fine imposed on Deutsche Bank’s subsidiary, DWS, in September 2023 for greenwashing, highlighting the growing consequences for asset managers. Identifying greenwashing is becoming increasingly important with the growing reliance on Environmental, Social, and Governance (ESG) data and sustainability claims.

The investment landscape is shifting, with a significant increase in sustainability-focused investment strategies. Investors are demanding more sustainability-related data and metrics to align their portfolios with their values. Many also believe that sustainability efforts contribute to long-term value creation (Unruh et al., 2016, p. 7). Consumer behavior is evolving, with people becoming more aware of environmental issues, ethical concerns, and the need to support eco-friendly, ethically sourced, and fair-labor products (SAP, 2024). Companies that prioritize sustainability—by reducing carbon emissions, recycling materials, or supporting social causes—are gaining popularity (SAP, 2024).

Greenwashing erodes trust in sustainability claims, making it harder to distinguish between genuine efforts and misleading practices. For investors, greenwashing can damage company reputation, impact financial performance, and weaken investors’ confidence in sustainability-oriented investments. It also prevents consumers from making informed decisions by obscuring the true environmental impact of purchases. Moreover, it can negatively impact the entire industry by reducing the demand for genuinely sustainable products (Yang et al., 2020, p. 1487).

To successfully navigate these complexities, investors must be able to detect greenwashing in corporate ESG reports.

Read more: Financing Sustainable Transition: Key Insights for Investors

• Unverifiable Sustainability Targets: Many companiesv set ambitious long-term carbon reduction targets but fail to take meaningful action to achieve them. It is essential to check whether a company reports specific strategies and actions to meet its sustainability commitments. Without a clear plan, these targets may simply serve as marketing tools rather than real environmental progress (File, 2024). For example, a company may announce a goal to achieve net-zero emissions by 2025. However, if its sustainability report lacks concrete steps, interim targets, or details on how it plans to transition its supply chain to renewable energy, the pledge remains a marketing statement rather than a genuine commitment to sustainability (Akepa, 2025).
• Lack of Transparency: Some companies fail to provide clear, verifiable information about their environmental practices, making it difficult to assess the validity of their claims. For example, a major fashion brand might claim a 30% reduction in emissions, but upon closer inspection, this applies only to its own operations (Scope 1 and 2) while excluding emissions from production, transportation, and disposal (Scope 3), which account for over 90% of the company’s actual footprint (Berg & Magnus, 2020; Bhargava et al., 2022; File, 2024).
• Vague or Exaggerated Claims: Buzzwords like ‘eco-friendly’, ‘green’, or ‘sustainable’ are often used without supporting evidence. If a company claims that its product is sustainable but provides no data on sourcing, manufacturing, and disposal, investors should look for independent certifications to verify those claims (File, 2024; Schor, 2024).
• Diversion Tactics: Some companies highlight minor sustainability efforts to distract from major environmental impacts. For example, a car manufacturing company may advertise donations to wildlife conservation or boast about using recycled materials in vehicle interiors while avoiding discussions about the carbon footprint of its production process, supply chain emissions, or vehicle lifecycle impact. Investors should ask—is the company addressing its most significant environmental challenges? (File, 2024; Client Earth, 2022).
• Misleading Certifications: Some companies display certifications or labels that appear to indicate third-party validation but do not meet rigorous standards. To spot ‘fake’ labels, investors should verify whether a certification has been issued by an independent, credible organization with strict verification criteria (File, 2024; Leafr, n.d.; Safdie, 2023).

ESG ratings can be a valuable tool for identifying greenwashing. Yet, research has shown that ESG scores correlate with greenwashing behavior, as they often reflect a company’s reported sustainability efforts rather than its actual environmental impact (Kathan et al., 2025, p. 1). This means that companies with high ESG scores may still engage in greenwashing if their ratings are based on self-reported data rather than real performance metrics.

To address this issue, Inrate goes beyond self-reported data in its ESG assessments, with its methodology including:

• Controversy Analysis: Investigating whether a company is involved in harmful business practices based on third-party sources—if significant controversies arise, the company’s ESG score is downgraded.
• Product Screening: Identifying companies engaged in controversial activities, such as nuclear power, palm oil, pesticides, or fossil fuels—this process helps investors understand a company’s involvement in industries they may wish to avoid.

Read more: ESG Controversies Screening

With the use of rigorous methodologies, ESG ratings can help investors distinguish between companies that are genuinely sustainable and those engaging in greenwashing.

References:
Akepa. (2025, January 23). Greenwashing: 18 recent stand-out examples. https://thesustainableagency.com/blog/greenwashing-examples/   

Berg, A., & Magnus, K.-H. (2020). Fashion on Climate: How the Fashion Industry can Urgently Act to Reduce its Greenhouse Gas Emissions. McKinsey & Company.  

Bhargava, Hoffman, S., & Jakic, N. (2022, May 4). Climate sustainability in retail: Who will pay? https://www.mckinsey.com/industries/retail/our-insights/climate-sustainability-in-retail-who-will-pay  

ClientEarth. (2022, March 8). 5 leading actions on greenwashing. https://www.clientearth.org/latest/news/5-leading-actions-on-greenwashing/  

File, C. (2024, April 30). Think Your Green Investments Are Safe? Learn What Greenwashing Could Mean for You. Sustainalytics.Com. https://www.sustainalytics.com/esg-research/resource/investors-esg-blog/what-is-greenwashing-and-how-can-investors-reduce-the-risks  

Kathan, M. C., Utz, S., Dorfleitner, G., Eckberg, J., & Chmel, L. (2025). What you see is not what you get: ESG scores and greenwashing risk. Finance Research Letters, 74, 106710. https://doi.org/10.1016/j.frl.2024.106710  

Leafr. (n.d.). Forest Stewardship Council (FSC) Certification. Retrieved March 26, 2025, from https://www.leafr.com/certs-and-frameworks/forest-stewardship-council-fsc-certification 

Safdie, S. (2023, August 30). Our Guide to Identify a Misleading Green Label. https://greenly.earth/en-gb/blog/company-guide/our-guide-to-identify-a-misleading-green-label  

SAP, B. (2024, May 14). Why the Rise of Sustainability Is a Shift in Consumer Consciousness. Forbes. https://www.forbes.com/sites/sap/2024/05/14/why-the-rise-of-sustainability-is-a-shift-in-consumer-conciousness/  

Schor, J. (2024). Five Sustainability Buzzwords and What They Really Mean. Green America. https://www.greenamerica.org/your-green-life/five-sustainability-buzzwords-and-what-they-really-mean  

Unruh, G., Kiron, D., Kruschwitz, N., Reeves, M., & Rubel, H. (2016). Investing For a Sustainable Future. MIT Sloan Management Review.  

Yang, Z., Nguyen, T. T. H., Nguyen, H. N., Nguyen, T. T. N., & Cao, T. T. (2020). Greenwashing behaviours: Causes, taxonomy and consequences based on a systematic literature review. Journal of Business Economics and Management, 21(5), Article 5. https://doi.org/10.3846/jbem.2020.13225