Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing

Abstract

This article identifies greenwashing risks in climate investing. Requirements are defined for strategies that are able to influence firms to reduce their greenhouse gas emissions. Based on stylized equity strategies constructed using firm-level emissions data, results show that commonly used portfolio construction mechanisms fail to demonstrate consistency with investor impact objectives. Such equity strategies boil down to greenwashing: they exhibit attractive climate metrics at the portfolio level but do little to reallocate capital in a manner that would incentivize companies to contribute to the climate transition.