Green Ambiguity Shapes Sustainable Investing

ABSTRACT Green Exchange‐Traded Funds (ETFs) have experienced strong growth in recent years, reflecting increasing investor attention toward sustainability. However, these funds rely on a wide range of environmental metrics that are often weakly aligned, raising concerns about the meaning of greenness in sustainable investing. In this study, we investigate the “true greenness” of green ETFs. We use alternative environmental metrics to select the greenest stocks among the constituents of the 10 largest green ETFs and construct Synthetic Green Funds (SGFs). We show that SGF composition is highly sensitive to the chosen metric, implying that what qualifies as a green investment varies markedly across definitions. Finally, we find that green ETFs and SGFs are driven by different risk factors, suggesting that they may not belong to the same asset class. Our results show how ambiguity in environmental metrics shapes sustainable investing, with important implications for ongoing regulatory standardization efforts.