Investors more likely to opt for green labels over financial returns, fueling greenwashing concerns

Over the past decade, sustainable investing has exponentially grown in its global impact and popularity. This emerging trend led University of Waterloo researchers to investigate how green labels influence investment decisions. The study is published in the journal Humanities and Social Sciences Communications.

“Green labels on bonds and other investments indicate that the funds are allocated to environmentally sustainable projects, such as renewable energy, clean transportation, or climate adaptation,” says Dr. Adam Vitalis from the School of Accounting and Finance. “The purpose of green labels is to promote sustainability.”

Vitalis, in collaboration with Dr. Olaf Weber and Dr. Vasundhara Saravade from the Faculty of Environment, discovered that investors are more likely to choose a bond labeled as “green” over a non-green bond, even when the latter offers higher financial returns. Results from their study show that green bond labels play a crucial role in shaping investor behavior—sometimes at the expense of actual environmental impact.

One of the study’s most significant findings is the potential for greenwashing—the practice of misleading investors by overstating an asset’s environmental benefits. Since many investors rely on labels rather than conducting thorough due diligence, there is an increased risk that investors will sink capital into financial products marketed as “green” that do not deliver real sustainability benefits.

Vitalis explains further that, “Greenwashing undermines investor confidence and risks diverting capital away from genuinely sustainable projects, slowing progress toward real climate solutions.”

The study surveyed over 1,100 participants. Each participant was given three different investment scenarios and asked to choose between bonds that varied in labeling, environmental benefits and financial returns. The researchers compared how different factors affected investors’ choices, such as personal environmental beliefs, financial knowledge and willingness to take risks. The results suggest that labels alone can strongly influence investment behavior, sometimes leading investors to prioritize perception over reality.

Specific investor demographics, such as those with high-risk tolerance, prior investment experience or employment in finance, are more likely to invest in green-labeled bonds. This insight could help policymakers tailor educational programs and incentives to protect investors from misleading sustainability claims.

Moving forward, the researchers point out that stronger regulatory frameworks to standardize green bond labeling and improve transparency are needed.

“Regulatory safeguards play a crucial role in addressing this by ensuring transparency, accountability and clear sustainability criteria in financial markets. Emerging disclosure standards require firms to provide accurate, comparable sustainability information, which helps protect investors from misleading claims and ensure that financial capital flows to support meaningful environmental commitments and long-term sustainability goals,” adds Vitalis.