As sustainable investing becomes more mainstream, so too does the risk of greenwashing– the practice of exaggerating or misrepresenting the environmental and social impact of a company or investment portfolio.
According to a 2024 report from the Morgan Stanley Institute for Sustainable Investing, over three quarters (77%) of global investors are interested in sustainable investing, and more than half (54%) anticipate increasing their sustainable investments in 2025. However, while over 70% of investors believe good environmental, social, and governance (ESG) practices can generate strong financial returns, more than 60% are concerned about greenwashing risks and a lack of transparency with ESG data.
People are more concerned now than ever before with how their money and actions impact the world around them. Younger generations want to have a positive impact in addition to financial success. This shift in priorities– purpose alongside profits– has catapulted impact investing and sustainable investing to the forefront of investment discussions more recently, although the practice has existed in many forms and under different names for decades. The Global Impact Investing Network (GIIN) defines impact investing as “investments made to generate positive, measurable social or environmental impact alongside a financial return.”
Before there was impact investing as we know it today, there was Socially Responsible Investing (SRI) started by religious Quakers in the 1700s who refused to invest in the slave trade, the Principles for Responsible Investment (PRI) developed by the United Nations and a group of the world’s largest institutional investors in 2005, and venture philanthropy a concept introduced in 1997 that urged philanthropic foundations to adopt practices from venture capitalists to maximize their impact. These are just a few mission-driven investment frameworks from over the years that have informed the current field of impact investment.
These days, even the most ardent “free market” capitalist institutions, such as The University of Chicago Booth School of Business, have classes on impact investing, including Impact Investing 101, which is taught by Impact Investing Executive in Residence and alumna, Priya Parrish, MBA ‘09, who is a partner and Chief Investment Officer at Impact Engine.
Corporate actors are eager to slap on the “sustainable” label, but not all deliver on the promises implied by that branding. There are various ESG reporting frameworks, but they all vary slightly; without consensus on a definition or the best way to measure impact, individual investors can easily get lost trying to decipher genuine impact from empty promises. This growing disconnect poses a serious challenge to the legitimacy and effectiveness of impact investing.
The Problem with Greenwashing
The term greenwashing stems from an actual washing machine-related incident. In 1983, the environmentalist Jay Westerveld was staying at a hotel that urged guests to reuse towels to help the planet. However, at the same time, the resort was undergoing a major expansion and destroying sensitive ecosystems and natural resources nearby; the hotel was trying to use ‘green’ washing practices to appear more environmentally friendly.
Here are just a handful of famous greenwashing examples:
- Chevron’s “People Do” PR campaign portrays the oil company as a protector of the environment without acknowledging its harmful environmental effects.
- Volkswagen’s “clean diesel” campaign for cars that used software to cheat emission tests while producing nitrogen oxide emissions up to 40 times the legal limit.
- Coca-Cola sponsoring COP27 climate talks and pledging to recycle one bottle for each sold by 2030, after disclosing that it produces 3 billion tons of plastic packaging annually.
Greenwashing distorts the investment landscape. It erodes trust among consumers, misleads investors, and ultimately takes capital away from truly impactful initiatives. Greenwashing can range from blatant lies and illegal actions to distracting branding and intentionally misleading labels such as “green” or “eco-friendly” that don’t have a standard definition, but imply environmental benefits or harm reduction. Environmental buzzwords with no legal backing make companies appear to care more about their climate impact than they truly do. When any company can market itself as “green” without clear criteria or accountability, genuinely mission-driven enterprises struggle to stand out, and it becomes increasingly difficult for investors to distinguish between authenticity and performative statements when building an impact-driven portfolio.
From Greenwashing to Greenhushing
In addition to greenwashing, a new problem is emerging: greenhushing. In response to growing scrutiny from regulators and consumers and fear of being accused of greenwashing, many companies and financial institutions are becoming increasingly quiet about their climate goals and sustainability efforts. Whether due to public backlash, legal uncertainty, or fear of retaliation from the Trump Administration, this self-censorship is having a chilling effect.
Rather than improving the quality of sustainability reporting and impact measurement, greenhushing suppresses transparency altogether, making it even harder for impact investors to evaluate where their money is going and what change it’s supporting.
The Core Issue: No Standard Definition of “Impact”
One of the main causes behind both greenwashing and greenhushing is the lack of a universally accepted definition of impact. Mission-driven concepts of ESG, SRI, and impact investing are often lumped together, despite having different goals and metrics. Every impact investment fund has its proprietary process to define and evaluate impact, as does every large financial institution with a sustainable investment arm. The alphabet soup of existing impact frameworks creates confusion rather than clarity, and without a consistent standard, firms can cherry-pick what to report or opt out of reporting altogether. Below are just a few of the major global reporting frameworks:
- Sustainability Accounting Standards Board (SASB): standards that help companies identify sustainability-related risks and disclose relevant information to investors.
- IRIS+: a set of tools and guidance to translate impact intentions into measurable results.
- Global Reporting Initiative (GRI): standards to help companies report on their impacts on the economy, environment, and people comparably and credibly.
- U.N. Sustainable Development Goals (SDGs): a shared blueprint for peace and prosperity for people and the planet.
How Impact Funds Can Stand Out
To rise above the noise, impact investing firms must go beyond labels. To do this, they can:
- Use credible frameworks and third-party certifications to provide transparency and comparability, and educate investors on the meaning and differences between various reporting frameworks. Impact investing firms can provide investors with a primer on the different reporting metrics and explain which frameworks are most aligned with their investment thesis. While there is no single definition of impact that is codified by law, the reporting frameworks offer specific, generally agreed-upon criteria on which to assess impact. Awareness and understanding of these standards will help investors know what to look for when evaluating companies and investment firms for themselves, and help them to put pressure on companies that are not already aligned to sign on.
- Clearly define their impact goals and evaluation framework, explaining what outcomes they seek and how they measure them. Fund managers can calculate the social return on investment (SROI) to quantify the social value that every dollar invested helps produce. Measurements like SROI help investors understand how their investments contribute to tangible environmental or social impact, in addition to generating financial returns. It is also a way for investors to show how their investments deliver positive change that wouldn’t have occurred otherwise. Over time, reporting evaluation criteria and results honestly, both successes and shortfalls, will help build credibility and a culture of authenticity among the investor community.
Investors also play a key role in combating greenwashing and greenhushing. They can:
- Consult third-party ESG ratings such as Sustainalytics and MSCI, which provide data-driven ratings of a company’s ESG risk exposure and performance to inform investors. The ratings assess companies across multiple dimensions and identify the most material issues for a specific company and the industry as a whole. The ratings also rank a company’s management of ESG risk factors within their industry, sub-industry, and market overall. While third-party ratings are valuable and another quantifiable way to assess impact, investors must make sure to look beyond ESG ratings and ask how a fund defines and measures impact across its portfolio.
- Compare voluntary reports with required disclosures and scrutinize impact reports for meaningful data, not just anecdotes or vague commitments. By comparing what a company highlights in its impact or sustainability reports with its 10-K, investors can determine what the company truly considers to be material, as opposed to what it just talks about for good branding. Companies may put out bold climate goals (e.g., net-zero by 2030, ending plastic packaging) or social commitments (e.g., fair-trade, living wages) on their website or impact reports, but their legally required financial reports often fail to mention such efforts and sometimes even contain contradictory statements. For example, ExxonMobil claims to be a leader in the energy transition through new low-carbon operations, but refers to the energy transition as a risk to its oil operations in its 10-K. By becoming a thorough investigator, investors can learn to discern between surface-level statements and authentic action, and push companies to understand that impact truly is material to its investors.
Ultimately, impact investing has the power to align profits with purpose, but only if we can reliably separate true impact from well-marketed illusions. The path forward lies not in louder claims or total silence, but in honest, transparent, and measurable progress.
Reader question
What do you think can help improve authenticity and reduce greenwashing in impact investing– stronger regulations, reporting requirements, individual investor actions, or something else?