Getting Ahead of Greenwashing: A Primer for Stakeholders

Greenwashing is multifaceted, involving creating the impression, however inadvertently, that a company is doing more to protect the environment than it really is.

Forms of greenwashing

 Source: The Conference Board, 2022

Giving the impression that a company, business, product, or service is environmentally friendly or ecologically sustainable when there is little or no evidence to back those claims is the essence of greenwashing. A less obvious form of greenwashing is a failure to provide a holistic view of a firm’s overall environmental impact. For example, many businesses selectively disclose sustainability data and produce sustainability reports, but their efforts tend to focus on their intentions and be biased toward celebrating success.^[1] Further, the lack of a clear understanding of what qualifies as “green” and no standardized certifications also contribute to greenwashing.

Insights for What’s Ahead

• Companies may expect more scrutiny from regulators, environmental groups, consumers, investors, and other stakeholders, elevating the risk of being perceived as engaging in greenwashing. Even asregulatory interventions increase, consumers and environmentalists are also engaged in more activism. Consumers no longer shy away from registering formal allegations of greenwashing against companies, taking particular aim at climate change statements and commitments. Companies may also face lawsuits and regulatory scrutiny arising from actions initiated by environmental groups.
• At its core, greenwashing is an ethics issue that calls for collective responsibility. Companies need to be mindful about disclosures. If they are making a claim, it should be based on real, significant impact, and they should communicate this impact transparently. The responsibility of tackling greenwashing requires a cohesive effort by boards, asset managers, governance professionals, advertisers, and consumer activists.
• At any cost, advertising campaigns must not be misleading. Companies need to carefully tread the line between enhancing their brand and veering into reputational risk territory. Conscious corporations must stay away from making environmental claims and advertising pledges that are unsubstantiated or not scientifically accurate.
• Investors who believe greenwashing claims may drastically increase their risks. Stakeholders in companies that engage in greenwashing stand to suffer in the long term. Stakeholders who remain invested in such companies run the risk of causing actual damage to the environment, as well as reputational damage and financial loss.

Greenwashing Is More Prevalent Than We Might Think

Corporate green claims

In 2021, the European Commission found that more than 40 percent of green claims made on business websites were “exaggerated, false or deceptive” and could fall afoul of EU rules. Upon a detailed analysis of these seemingly incorrect or misleading statements, the commission and consumer authorities found that:

• In more than half of these cases, the trader did not provide sufficient information for consumers to judge the claim's accuracy.
• In 37 percent of these cases, the claim included vague and general statements such as “conscious,” “eco-friendly,” or “sustainable” that aimed to convey the unsubstantiated impression to consumers that a product had no negative impact on the environment.

One common strategy is to use the word or the color green or images of leaves, plants, and forests to suggest that products are eco-friendly.^[2] A report by the Changing Markets Foundation investigating the use of synthetic fibers in clothes production and transparency found that nearly 60 percent of all sustainable fashion claims are greenwashing. European fashion brand ASOS is among the biggest greenwashing culprits; 89 percent of its claims are unsubstantiated or likely to be misleading to consumers, the report found. As a signatory to Textiles 2030, an action plan for sustainable clothing and fashion, ASOS has responded by working toward more sustainable products and finding solutions to issues in using “virgin synthetics” (made from crude oil or petroleum).^[3]

Other greenwashing cases among European textile companies include claims of synthetic products being recyclable when no such technology exists, claims of products being “sustainable” or “responsible” with no evidence, or claims about so-called recycled products that don’t specify the amount of recycled content. Similarly, the UK Competition and Markets Authority has begun an investigation into the veracity of fast-fashion chain Boohoo’s eco-friendly claims. While agreeing to cooperate with the investigation, Boohoo stated that it was committed to providing customers with correct product information.^[4]

Stakeholders, including consumers, are also analyzing claims companies make in the context of climate. In July 2021, Oatly, one of the world’s largest oat milk companies, faced a shareholder class action alleging misleading statements it made about the greenhouse gas emissions and energy consumption associated with its product.

In investment products

Greenwashing is also frequently encountered in the investment space. Given that securities are advertised and marketed differently than retail products, identifying which claims are incorrect and misleading may be more challenging for financial investors. The International Organization of Securities Commissions (IOSCO) recently described greenwashing as “the practice of misrepresenting sustainability-related practices or the sustainability-related features of investment products.”^[5] As the authors of a recent article in The National Law Review specified: “The practice of “greenwashing” refers to firms or companies claiming they are abiding by ESG principles, especially environmental, when in fact they do not so comply.”^[6]

In 2021, a Bloomberg report identified certain major drawbacks in the US-based finance company MSCI’s ESG ratings for stocks: while analyzing and rating businesses, MSCI did not consider the actual environmental footprint of the company at all.^[7] This is another form of greenwashing.

Regulators Respond to Greenwashing Claims

Regulators in several jurisdictions (e.g., Canada, India, and the US), and particularly in Europe, have taken note of greenwashing and are in the process of regulating companies’ conduct. Recent trends in stakeholder activism in this regard demonstrate that consumers are no longer shying away from registering complaints alleging greenwashing by companies.

European regulations aimed at tackling greenwashing

In the US, the SEC in 2022 proposed two rules that, considered together, seek to check and curb greenwashing: Investment Company Names (“Names Rule”) and Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices (“ESG Disclosure Rule”).

Companies may also face lawsuits and regulatory scrutiny upon actions initiated by environmental groups. However, the regulatory frameworks are still at a nascent stage, and the views on what is green are not consistent across different jurisdictions. For example, while gas and nuclear projects are included in the list of sustainable “green” activities in the EU taxonomy, certain member states (e.g., Austria and Luxembourg) do not align with this view. Determining what is green is not as straightforward as one may think.

Different jurisdictions define green activities differently. Determining what is green is not as simple as it seems.

The lack of a clear understanding of what qualifies as “green” and no standardized certifications also contribute to greenwashing. In our earlier report What is Green? EU Taxonomy for Sustainable Activities, we discuss the EU’s attempt to classify and define what constitutes “green." The EU Taxonomy defines activities as “environmentally sustainable” if they: 1) substantially contribute to at least one of the six environmental objectives, 2) do no significant harm to any of the other five environmental objectives, 3) meet minimum safeguards (i.e., do not have any negative social impacts), and 4) comply with technical screening criteria. While the trend to objectively classify what is green is positive, it is not a globally recognized view.

The Onus Is on Companies to Communicate Honestly and Effectively

Greenwashing has expanded as a workaround to comply with increased regulation. Greater demand for environmentally friendly and sustainable products also acts as an incentive for companies to respond by “greening” their offerings.

At its core, greenwashing is an ethics issue that calls for collective responsibility. Companies need to be mindful about disclosures. When they make a claim, it should be based on real, significant impact, and they must communicate this in a transparent manner.

To avoid greenwashing, companies must ensure their claims are:

• Accurate and substantiated by scientific evidence
• Certified by a reputable standard
• Balanced and fair 

In our earlier report Telling Your Sustainability Story, we highlighted key strategies for companies and executives to communicate authentically, reliably, and effectively. Companies must be mindful while complying with regulations that they do not make unsubstantiated claims. Companies may even consider ramping up external sustainability assurance services to ensure the reliability of their claims.