With the threat of global warming, increasing awareness of both individual and corporate carbon footprints, and a general trend toward saving the environment, going "green" is seen by many as being socially responsible and is becoming part of marketing strategies around the world. Environmentally conscious investors may even, to some extent, choose green companies over others when making investment choices. So, with the general trend toward all things green, the term "greenwashing", which was coined by American environmentalist Jay Westerveld back in 1986, has taken on greater significance. Greenwashing is a combination of the words "green" and "whitewashing" – a term which has long been used to describe trying to make something bad look good, but it remains fundamentally bad. And so the term greenwashing has come to be applied to the practice of spending more time and money advertising that a company or product is green, than actually implementing environmentally sound practices.

In an essay relating to the hotel industry's practice of encouraging guests to re-use their bath towels, thereby cutting down on laundry and doing their bit to save the environment, Westerveld noted that little or no effort was being made to recycle waste by the hotels investigated. In fact, their environment saving efforts never went beyond leaving the placard in guest rooms offering the option of clean towels or reuse. Guests who choose to reuse their towels may feel they have made a sacrifice for the good of the environment, while the hotel scores some extra profit.

Greenwashing is essentially a matter of public relations where a company may launch, (or re-launch) a product with great fanfare, drawing attention to some "green" feature. It is not uncommon for companies to make use of unsubstantiated claims and implied third-party endorsements, or merely to change the name of the product to sound environmentally friendly, without actually changing the product.

A prime example of greenwashing is car manufacturers that claim their cars are environmentally friendly, clean or green. Environmentalists, quite justifiably, argue that any car run on fossil fuel cannot be beneficial to the environment. At best, one car may do less damage than another car, through limiting emissions, but they still emit harmful gases. By making the claim that a car is environmentally friendly, or even implying that this is so, marketers of the product are appealing to the emotions of the buyer who wants to appease his conscience about driving his gas-guzzler.

Of course, not all companies or products claiming to be environmentally friendly are engaging in greenwashing. There are many that are genuine. However, investors may want to be mindful of the practice if they tend to be biased toward green companies when making investment decisions.