What One Private Equity Investor Calls ‘Greenwashing,’ Another Calls ESG

Different definitions and approaches to sustainable investing have led to disagreement over which environmental, social, and governance claims are legitimate, according to PitchBook.

Illustration by II (Qilai Shen/Bloomberg)

Illustration by II

(Qilai Shen/Bloomberg)

Greenwashing is often in the eye of the beholder, depending largely on one’s sustainable investing philosophy, according to PitchBook analyst Anikka Villegas.

In an analyst note published Monday, Villegas wrote that the growth in environmental, social, and governance investing has come with confusion and disagreement about the definitions of terms like ESG, sustainable investing, and impact investing. As a result of this lack of clarity, many venture capital and private equity firms have been accused of greenwashing — claiming to practice ESG and sustainability but not following through on those promises.

While some firms are guilty of this deception, Villegas argued that many of the greenwashing accusations are a product of a difference in philosophy: Investors have different ideas about what sustainability, ESG, and impact look like in practice.

In the note, Villegas explores three sustainable investing philosophies held by investors and explains how each philosophy can result in a drastically different-looking portfolio. She said these different philosophies can impact the accepted risk levels and required risk mitigation for investing in high-to-medium ESG-risk industries, willingness to invest in companies with moderate-to-high levels of ESG risk that the companies could manage but are not, and willingness to exit companies with these types of risks.

Investors that operate under what Villegas called a purist ESG philosophy would likely avoid investing in companies in sectors like oil, coal, and gas. ESG purists, according to Villegas, “invest only in companies operating in green industries, such as alternative energy, sustainable agriculture, and healthcare technology, foregoing investments in companies in industries that are not green and aren’t at least moderately well-performing with respect to each of the E, S, and G areas.”


Meanwhile, a firm with a pragmatist ESG approach would invest in industries like food product manufacturing and textile production, which, according to Villegas, “neither inherently harm nor contribute to a more sustainable economy.” Pragmatists are willing to accept a bit more ESG risk from their portfolio companies.

A pluralist ESG philosophy takes the highest-risk approach. A firm with this approach would likely take a chance on portfolio companies in high-risk industries with unmanageable ESG risk and “unmanaged manageable risk.”

Villegas noted that the three philosophies manifest in different ways in private equity and venture capital, further varying investors’ ideas of what constitutes greenwashing. For a purist, for example, the implementation of ESG in private equity is the most challenging during the pre-investment due diligence stage.

Private equity managers with a purist philosophy invest only in low-ESG-risk companies, which means they need to have a thorough understanding of the company-level and industry-level risks prior to investing. These investors will prioritize information like ESG ratings and reports to help them during the early stages of due diligence.

According to Villegas, purists consider it greenwashing when any firm that claims to practice ESG invests in socially or environmentally harmful industries, or in companies that don’t contribute to sustainability.

“In many cases, greenwashing accusations from purists are likely to be false positives, where the accused ESG approach simply aligns with a different philosophy and is in fact transparent about its intentions and execution,” Villegas wrote.

While ESG pragmatists do their due diligence, they are less strict about vetting portfolio companies for sustainable business practices, particularly in the pre-acquisition stage. These investors a bit more willing to take on some ESG risk, Villegas said. For this reason, pragmatists have a more lenient definition of greenwashing, believing that it occurs when managers claim to practice ESG and then invest in companies with a lot of unmanageable ESG risk, or when managers invest in a company with a lot of manageable ESG risk and don’t work to mitigate it.

The pluralist philosophy is the most flexible philosophy in its approach to ESG and greenwashing. For this reason, Villegas said pluralists see greenwashing when an investor claims to practice ESG but makes no movement to improve a portfolio company’s ESG profile during the holding period. Another form of greenwashing, according to these investors, is when managers fail to mitigate a company’s manageable ESG risk.

“To combat perceptions of greenwashing under this philosophy, it is especially important to keep policies at the ready, describing what ESG means to the investor, how materiality is defined, and what steps have been taken to meet established sustainability goals,” Villegas wrote.

It’s unlikely that investors will ever agree on the adoption of a single philosophy, Villegas wrote, making it challenging for investors to identify which strategies qualify as ESG.

“While greenwashing claims may continue to fly, investors should do their own diligence to determine whether a fund manager is being intentionally misleading, inaccurate, or negligent in their branding or if they are legitimately offering what they claim, which may not be to everyone’s taste,” she concluded.