Sustainable startup or greenwashing? An angel investor’s guide to spot the difference

Whilst it’s becoming more widely recognized that the world is already in the midst of a climate crisis, there is also a growing recognition among investors that sustainability is not only good for the environment but also critical for long-term financial success. Companies that prioritize sustainability are often more efficient in their use of resources and may be better equipped to adapt to a changing regulatory landscape. Also, consumers are increasingly demanding sustainable products and services. By investing in these companies, you can tap into this growing market and potentially see higher returns on your investment.

But it can be hard to tell the difference between a truly sustainable company and one that's just using greenwashing tactics, either intentionally or inadvertently. With this in mind, the European Commission recently unveiled a new set of rules for the consumer market that will require companies to back up their green claims with credible scientific evidence. In this guide, we'll additionally show you how to spot greenwashing and invest in truly sustainable startups.

What is greenwashing?

Greenwashing is a marketing tactic used by companies to make exaggerated or false claims about their environmental practices. It is intended to create the impression that the company is environmentally responsible, even if they are not. Greenwashing can be used to mislead consumers or investors, and it undermines the efforts of companies that are genuinely committed to sustainability.

Is greenwashing always intentional?

The short answer is no. It’s possible to greenwash by mistake or naivety. The company might genuinely believe that they are doing the right thing for the environment, but the impact of its actions is marginal or even harmful.

For example, a company might claim that their product is "100% natural" and therefore environmentally friendly, but fail to disclose that the production process involves significant resource depletion or pollution. Or it might claim that its product is recyclable but fail to mention that the recycling process itself is energy-intensive or creates additional pollution.

How is greenwashing different from green marketing?

Green marketing is a legitimate marketing strategy used by companies to promote their environmentally friendly products or practices. The goal of green marketing is to stand out, gain a competitive advantage or draw attention to their worthy cause.

Greenwashing on the other hand tries to create the impression that a company is environmentally responsible, even if they are not, mainly to mislead consumers or investors.

In short, the key difference between green marketing and greenwashing is the truthfulness and accuracy of the claims being made. Green marketing is truthful and accurate and communicates legitimate environmental benefits to consumers. Greenwashing, on the other hand, is deceptive and misleading and is intended to create a fake facade of environmental responsibility.

4 ways to detect greenwashing

1. Look for vague language

Using vague or ambiguous language is a common greenwashing tactic to make a product or company appear more environmentally friendly than it is. Phrases like "eco-friendly," "sustainable," and "green" are often used to mislead consumers and investors. So, how can you tell if a company is truly living up to these claims?

First, look for specific details in their marketing materials. A company that prioritizes sustainability will be transparent about its practices and provide specific details. For example, they may mention the percentage of recycled materials used in their products or the amount of energy they've saved by implementing a new manufacturing process.

On the other hand, a company that's just greenwashing will use vague or generic phrases that don't provide any real information about their practices. They may use terms like "eco-conscious" or "green-minded" without explicitly backing up these claims.

2. Investigate and ask for hard data

Don't just take a company’s word for it — do your own research. One way to do this is to look for third-party certifications. These certifications are awarded to companies that meet specific environmental standards and can help you confirm a company's commitment to sustainability.

It's also a good idea to look for specific data about a company's environmental impact. This might include information about their carbon footprint, water usage, or waste reduction efforts. If a company can provide specific data about its sustainability practices, it's a good sign that they're committed to making a real difference. Also, be aware of cherry-picking — highlighting the positive while failing to disclose the negative.

3. Be wary of carbon offsetting

Carbon offsetting platforms and initiatives have an arguable impact in general. One might compare them to selling indulgences, a medieval practice of paying money to absolve one of past sins and release them from purgatory. When companies use it as a way to claim to be environmentally responsible while continuing business as usual, the positive impact is questionable, to say the least.

However, not all carbon offsetting is inherently bad or deceptive. There are legitimate carbon offsetting programs that have been independently verified and shown to result in real emissions reductions, e.g. renewable energy projects or energy efficiency initiatives. It's important to carefully evaluate all claims related to carbon offsetting and to thoroughly investigate the credibility of the solutions being used.

4. Consider the company's overall environmental impact

Finally, it's important to consider a company's overall environmental impact. This means looking beyond just products or services and examining the entire supply chain and processes. For example, a company that claims to be eco-friendly but sources its materials from dirty companies is not as sustainable as they claim. Similarly, a company that uses energy-efficient lighting in their office but non-renewable energy for their manufacturing is not nearly as environmentally friendly as they could be.

Real-world examples of greenwashing

Investors develop their gut feeling over time. The more greenwashing stories you see, the more you know what to look out for. Here are some real-world examples of companies accused of greenwashing.

• H&M launched its Conscious Collection in 2012, claiming that it was made from sustainable materials and produced using eco-friendly processes. However, it turned out that the company was still sourcing materials from unsustainable sources and the manufacturing process was not as environmentally friendly as claimed.
• Juicero was a startup that developed a juicing machine that could only be used with specific juice packets. The company claimed that the packets were compostable, but it soon turned out that the packets were not fully compostable and actually created more waste than traditional juicing methods. Juicero eventually shut down in 2017.
• Blue Apron meal kit delivery service claimed to be committed to sustainability by sourcing ingredients from small farms and reducing food waste. On the other hand, it turned out that the company generated significant amounts of plastic waste from its packaging and had a higher carbon footprint than traditional grocery shopping.
• TOMS shoe company became famous for its "buy one, give one" model, in which the company donates a pair of shoes to a child in need for every pair purchased. While the company's philanthropic efforts were admirable, critics accused Toms of greenwashing because its shoes were made from non-organic materials, thus having a high carbon footprint.

The bottom line

As an angel investor, supporting sustainable startups is both a way to positively impact the environment, as well as tap into the potential of a greener tomorrow. Yet, it’s important to look out for companies who make empty claims and can’t deliver the impact they try to sell to their investors and customers.

To spot the difference between a truly sustainable startup and one using greenwashing tactics, be vigilant in your research. Investigate the company’s key claims, look for specific data, consider their overall impact, and remember— if something sounds too good to be true, there’s a high chance it isn’t.