The War on ESG Greenwashing

October 18, 2022

Many organizations brag about their green credentials, but how many of their claims are true? Whether by accident or through deception, greenwashing as part of ESG management is on the rise.
Many organizations brag about their green credentials, but how many of their claims are true? Whether by accident or through deception, greenwashing as part of ESG management is on the rise.

It’s not unusual for companies to be too enthusiastic when it comes to promoting the benefits of their products. Chewing gum doesn’t make life more fun, the latest technology gadget won’t guarantee your popularity and limited-edition running shoes won’t get you promoted to the NBA any time soon. Everyone knows this, but allowing this mixture of fantasy and reality to play out has been a fundamental tenet of corporate marketing for decades without causing any significant problems.

In the world of environment, social and governance (ESG), however, reality can hit extremely hard. When companies make promises to meet environmental commitments, such as reducing emissions, customers and regulators expect companies to keep those promises. When those promises fall short, the consequences can include brand damage, financial loss and even litigation. Making inflated environmental promises is known an “greenwashing,” and it is a shockingly common occurrence in today’s marketplace. This article will explore what greenwashing is, why it happens, what the consequences could be and how consumers and regulators are working to prevent it.

What is Greenwashing?

While many people have perhaps only recently come across the term greenwashing, it dates back to the 1980s. In 1986, environmentalist Jay Westerveld noticed that hotels had begun encouraging guests to reuse towels instead of putting them out for laundry after a single use, ostensibly to protect the environment by reducing the energy and water required for laundering. However, Westerveld suggested that the true motive was so the hotels could save money without having to make any effort to protect the environment. In other words, the motive was profit, and any benefit to the environment was entirely coincidental.

As the quantitative frameworks of ESG came to replace the good intentions and vague goals of corporate social responsibility (CSR) initiatives, greenwashing has become more consequential than simply a bit of clever slight-of-hand to save a few dollars on operational costs. With the Intergovernmental Panel on Climate Change (IPCC) having recently concluded that we must make significant changes to our approach to sustainability by 2050 to avoid catastrophic consequences for the planet, the stakes are high. Today, there isn’t one single definition of greenwashing (although here is a collection 25 different ones all in one place), but a general understanding of the concept is an organization disseminating misinformation about the sustainable qualities of a product to reap the benefits of the ESG zeitgeist without following through on any of claims or promises.

Sometimes, greenwashing is the result of enthusiastic marketing and clueless leadership that doesn’t understand the importance of ESG or the intricacies in implementing its principles effectively. However, in many cases, it is the result of deliberate deception. Examples of this include:

  • Hiding negative trade-offs, such as promoting the sustainable benefits of using a product that actually creates significant carbon emissions during its production. This can also extend beyond environmental concerns, such as environmentally friendly products that are produced using forced labor in contravention of ESG’s social principles.
  • Baseless claims, such as promoting the sustainable benefits of a product without having any quantitative evidence to support that claim.
  • Partial truths, such as claiming to have reduced emissions while only including Scope 1 emissions and excluding accelerating Scope 3 emissions.

Greenwashing is, unfortunately, quite common. A joint study by the UK Competition and Markets Authority and the Netherlands Authority for Consumers and Markets recently reviewed 500 global websites and assessed their green claims. Roughly 40 percent of the websites featured ESG claims that qualify as some type of greenwashing.

In fact, there is so much greenwashing taking place, there is even a subcategory of greenwashing called bluewashing. Bluewashing can refer to several types of deception. For example, organizations are bluewashing when they have signed the United Nations Global Compact to support universal sustainability principles but then don’t actually do anything to follow through on that commitment. In other words, they sign on so they can trumpet their virtue for having participated but then have no intention of doing the work. The blue part of the term refers to the color of the United Nations flag. Another type of bluewashing refers to organizations making unsubstantiated claims about their data privacy or the security of their artificial intelligence solutions.

What is the Cost of Greenwashing?

Greenwashing can have a significant impact on consumer confidence in an organization’s brand. Customers consider it hypocritical when brands make environmental claims without taking any action. Recent research suggests that when customers discover greenwashing, company ACSI (American Customer Satisfaction Index) scorers drop an average of 1.34 precent, which can impact company performance.

Not all organizations greenwash, and those that do don’t greenwash in the same way. Organizations with environmentally sensitive business models, those that follow the GRI (Global Reporting Initiative) guidelines and those that regularly issue sustainability reports tend to greenwash less. Interestingly, large organizations with high brand credibility and high product quality are not only more likely to engage in greenwashing, but they are also more likely to get away with it. Brand credibility can mitigate the impact of greenwashing for an organization. Companies with strong brands and high product quality often experience a negligible 0.3 percent drop in customer satisfaction levels.

Does the protection offered by credible brands and high-quality products mean those organizations now have carte blanche to greenwash? No. While loyal customers might ignore greenwashing by their favorite brands, others are more litigious. There is a growing body of litigation aimed at making governmental and non-governmental organizations engaged in greenwashing legally accountable for their deceptions. According to a report by the Climate Social Science Network, there have been at least 20 cases relating to greenwashing launched in the United States, Australia, France and the Netherlands since 2016, with many more expected. These cases tend to focus on three areas:

  • Failure to live up to environmental commitments, especially in relation to reducing emissions in accordance with the recommendations of the IPCC.
  • Misleading descriptions of environmental attributes for products.
  • Investment firms overemphasizing their green investments or hiding their investments in businesses that don’t meet ESG requirements.

ESG Under Attack

ESG is complicated. Since it includes a vast array of initiatives from the environment, social justice and corporate governance, each of which consists of multiple practice areas, organizations can find themselves on the wrong side of ESG ratings in one area despite having made considerable contributions in others. For example, Tesla was recently removed from the S&P 500 ESG Index because of shortcomings in its social responsibility commitments, despite the positive contributions Tesla has made to the environment. Further, the lack of standardization in ESG reporting can be a source of considerable frustration and effort in many organizations.

Some governmental and non-governmental entities have taken advantage of these discrepancies to attack the credibility of ESG, with some even proposing legislation aimed at restricting the extent to which investment firms can include ESG stipulations in their strategies. When organizations engage in greenwashing, it contributes to the discrediting of ESG and makes the possibility of achieving its goals far more difficult.

Separating Green from Greenwashing

There is no defined threshold for when a claim becomes greenwashing, which makes it difficult to determine the severity and impact of different instances of greenwashing. While there have been some attempts to form integrated frameworks to serve this function, other organizations have sought to fill the gap with general, common-sense guidance. The Competition and Markets Authority (CMA) has published a Green Claims Code to guide business towards transparent and honest behavior for green claims. The guidance includes a checklist for helping organizations verify their green claims. Here are a few of the checklist items:

  • The claim is accurate and clear for all to understand.
  • There’s up-to-date, credible evidence to show that the green claim is true.
  • The claim doesn’t contain partially correct or incorrect aspects or conditions that apply.
  • The claim won’t mislead customers or other suppliers.
  • The claim doesn’t exaggerate its positive environmental impact or contain anything untrue—whether clearly stated or implied.
  • Features or benefits that are necessary standard features or legal requirements of the product or service type aren’t claimed as environmental benefits.

Datamaran’s recent quarterly policy brief is titled Separating the ‘Green’ from ‘Greenwashing’: Social War on the Passing Anti-ESG Trend. It provides a detailed look at what organizations need to do to avoid greenwashing and, consequently, ensure they are not throwing fuel on the fire of anti-ESG trends.

New standards, proposed rules and recommendations are critical for organizations to avoid greenwashing. While trumpeting green claims on a website or prospectus might generate some brand buzz, the real proof of green credentials comes with ESG reporting using reputable frameworks like GRI (Global Reporting Initiative), PRI (Principles for Responsible Investment) and SASB (Sustainability Accounting Standards Board). Organizations should also ensure that their reporting and disclosures apply the principle of double materiality to ensure they are adequately assessing the impact of environmental risk on the organization and that of the organization on environmental risk.

While many organizations probably feel that a bit of greenwashing is a reasonable risk to get some eco-credibility without making any effort, there are more threats than there are opportunities in that strategy. In addition, it’s simply unethical and irresponsible. Instead of using deception to promote green credentials, it’s better to set realistic, achievable targets. It’s more valuable to set up an easy target and hit it in preparation for future progress than to set up an exceptionally large target you have no intention of aiming at. In the end, if it’s good for the planet, it’s probably good for your business as well.