How to tell if the companies you invest in are exaggerating their commitment to sustainability

• Greenwashing refers to companies who market themselves as more sustainably-minded than they are.
• But it can be difficult for the consumer to figure out if a company's environmental claims are true.

Interest in sustainable and socially responsible investing continues to grow. Last year, Bloomberg reported that global ESG assets are projected to exceed $53 trillion by 2025.

But it's sometimes tough for investors to know if a company or investment fund's sustainability claims are legitimate since there are no standard criteria for designating these investments. That makes instances of greenwashing more common.

Greenwashing refers to companies or investments marketing themselves as more sustainably-minded or environmentally centric than they actually are, Peter Klein, cofounder and chief investment officer of Aline Wealth, told Insider.

"The idea is that you're sort of painting with this fake brush," he said. "You're trying to make yourself look better than you are when it comes to a sustainability lens."

Greenwashing diminishes trust among investors

With investing that prioritizes environmental, social, or governance (ESG) factors — one of the fastest-growing segments of the investment industry — many companies fear losing out on assets as they transition from traditional funds into someone's ESG or socially responsible investing (SRI) funds, Peter Krull, founder and CEO of Earth Equity Advisors, told Insider. Because of this fear, companies and funds are tempted to misrepresent or exaggerate their commitment to these causes.

"It's a huge problem because how is the consumer — who isn't equipped to really do appropriate due diligence and look under the hood at the actual holdings of a particular fund — to find out, does it pass the test or not?" Krull said.

For example, a whistleblower recently called out BlackRock, the largest money manager worldwide, for greenwashing in its ESG funds. The BlackRock US Carbon Transition Readiness EFT is marketed as having "less carbon intensity" than the index but holds oil companies, including Chevron and Exxon, which investors committed to sustainability might not want to invest in.

"It affects our industry as a whole because it makes people not trust the ones who are actually doing the right thing. I think there's a risk in that," Krull said.

How to know if your investments are greenwashing

With no standards for ESG investing, it's up to investors to do the research. Krull suggested looking up the "fund family," or the different funds that an investment company manages, and reviewing a fund's annual or semiannual reports.

"If you start seeing companies in there that make you scratch your head and say, 'Why is this in here?' it's probably greenwashed or at the very least, not the best sustainable fund you can get," he said.

Resources like Bloomberg's ESG Data and the MSCI ESG Ratings and Climate Search Tool can help. Nonprofit As You Sow also offers an online sustainability scorecard to help investors find funds that align with the issues they care about, such as fossil-free, gun-free, or gender-equal funds.

Seeking out a financial adviser who works with ESG or SRI funds full time can also ensure someone's investments align with their values. "You don't have to believe in exactly the same thing," Klein said. "But you want to make sure you have alignment of values and expectations."

He suggested also looking for an adviser with a Chartered Sustainable, Responsible and Impact Counselor (CSRIC) certification from the College for Financial Planning.

And if something with the adviser or investment doesn't seem right, it probably isn't, Krull said. He compared the ESG landscape to the "Wild West."

"Anybody can label ESG without any real background, without any process, and there are no repercussions other than a consumer actually looking at what the bottom-line investments are and pulling their money," he said. "At the end of the day, that's who their regulator is."