Corporate greenwashing, or deliberately misleading investors about environmental impact, is rampant and rising. A shocking 68% of U.S. C-suite executives admit that their company engages in greenwashing.

The greenwashing problem starts with bad data. EY’s 2024 Global Corporate Reporting Survey of 2,000 finance leaders in 30 countries and 815 institutional investors reveals that 96% of chief financial officers have problems with the nonfinancial data used in impact reports and 55% worry their industry’s sustainability reporting lacks credibility, increasing the various risks associated with greenwashing.

“Finance leaders are highlighting the difficulty of producing credible reporting disclosures due to the highly complex nature of sustainability topics and the overwhelming amount of reliable data required for the new mandatory sustainability reporting,” said EY’s Velislava Ivanova.

Here are two key places where investors can spot greenwashing:

Net-zero pledges and carbon offsets

Greenwashing is often driven by corporate “net zero” pledges, often manifesting in firms buying carbon offsetting credits, ranging from carbon capture projects to solar- and wind-based renewables, and planting trees. A study by University of California, Berkeley found that each ton of CO2 emitted into the air costs society $185 per ton—3.6 times the U.S. federal estimate of $51 per ton.

However, a 2022 study from Bloomberg Green found that the average price of renewable-energy offsets paid was only about $2 per ton. Bloomberg listed several major offenders that use questionable carbon offsets to claim their activities are carbon neutral, including Delta Air Lines. The airline has claimed to be carbon neutral but Bloomberg revealed those claims to be largely bogus and supported by “junk” carbon credits of questionable efficacy.

Applying standards

It matters whether a firm undertakes a Life-Cycle Analysis, or LCA, or sticks to the bare minimum requirements for environmental, social and governance, or ESG, reporting (full disclosure: my firm Boundless Impact Research & Analytics provides Life Cycle Assessment to companies and investors).

Compared to LCA, ESG analysis is less rigorous, using mostly self-reported estimates and internally generated cost analyses.In other words, such analyses are not objective because the data has never been independently validated. Bare minimum ESG reporting flattens environmental impact into simple GHG emission stats, which can’t tell the full story.

LCA is the gold standard, measuring a product’s carbon footprint over its entire life—raw material extraction, manufacturing/processing, transport, usage/retail, and waste disposal.

LCA avoids the problem of being self-reported in three ways: reports are typically conducted by independent third parties, reports are peer reviewed and, crucially, LCA draws on data from specialized databases, such as Ecoinvent and GaBi, which use standardized information on environmental impact.

Of course, even some LCA analysis can be questionable, particularly when companies produce their own LCA reporting rather than engaging a third-party expert to conduct the analysis. Wool sneaker maker Allbirds was sued in 2001 over greenwashing. Allbirds prevailed because it followed an LCA reporting method used by the fashion industry, the Higg Material Sustainability Index. The index bizarrely gauged organic materials like cotton as less sustainable than synthetic materials. Subsequently, the index was dumped and then redesigned; the firm behind it was renamed as Worldly.

When reading an environmental report about a company, smart investors ask:

• Is the language being used “green” but vague?
• Does the report use misleading or false data? Where is the data sourced? What assumptions is the analysis based on?
• Does the firm highlight progress in one area but hide areas of poor performance?
• Does the firm use vague terms like “eco-friendly” or use imagery like trees rather than showing official data-generated certifications?

Regulators fight back

The European Parliament has banned greenwashing and made it illegal to label products with vague monikers like “environmentally friendly”, “natural”, “biodegradable”, “climate neutral” or “eco” without proof.

“Companies can no longer trick people by saying that plastic bottles are good because the company planted trees somewhere – or say that something is sustainable without explaining how,” said EU Parliament rapporteur Biljana Borzan of Croatia.

For investors, the good news is that a growing number of companies now acknowledge the merit in calculating environmental impact and are actively seeking to offset any harm. However, until most firms use more transparent science-based methods such as LCA to measure impact, it will be almost impossible to evaluate the real impact a company’s activities have on the environment.

Investing in transparent science-based impact evaluations is the best way for a firm to distinguish itself as an entity that is truly committed to mitigating its climate-related risks.

Firms like Allbirds and Delta that want the halo effect of being considered green while producing questionable environmental analyses would be wise to remember one of Abraham Lincoln’s famous quotes: “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.”

Michele Demers is founder and CEO of Boundless Impact Research & Analytics.