The Dangers of Greenwashing: And How to Mitigate Them

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In many sustainability-focused companies today, there is a constant tug-of-war between purpose-driven long-term thinking on one side and a sharp focus on short-term results on the other. The long-term view entails a need to invest and transform business models today to ensure the long-term survival of the business, which needs a thriving planet and society. The short-term view, on the other hand, entails the machinery of unabated focus on quarterly results and maximizing profits in the present. Sometimes what results from this dichotomy is a statement of intent or performance that is not matched by data or action on the ground.

What is Greenwashing?

Greenwashing is the use of misleading or unproven claims regarding the environmental sustainability of a company, product, project, or public policy decision. It is usually done to gain the trust of the public and other stakeholders while concealing the business-as-usual approach of driving growth at the expense of the environment.

What is Climate-Washing?

Climate-washing is a type of greenwashing that relates explicitly to misleading claims regarding climate-related performance or decarbonization initiatives. Climate-washing has been the subject of several recent litigation battles.

For example, the oil & gas sector has seen several climate-washing lawsuits. Since 2015, oil & gas companies have spent an estimated USD 200 million per year on anti-climate policy lobbying and messaging.

Leading organizations within the industry were promoting themselves as heavily invested in climate-friendly technologies and clean energy sources, while their actual investments in these technologies were a fraction of what they spent on increasing oil & gas production. Legal challenges to oil & gas companies have led, in some cases, to companies backtracking on their adverts.

However, climate-washing and greenwashing are, by no means, limited to fossil fuel companies. Examples of climate-washing accusations and litigation emanate from all sectors of the economy, including industries such as fashion, airlines, automobiles, and food.

What is Bluewashing?

A lesser-known variant of greenwashing is bluewashing, which has the same underlying theme of trying to make someone appear more ethical. Bluewashing involves misleading claims related to human rights and labor management. It is also used in the fishing and textile industries to refer to misleading claims about ocean pollution.

Why is Greenwashing Getting More Attention Now?

It may seem like greenwashing is just an extension of what companies have been doing since the advent of advertising – that is, exaggerating the benefits of their products and services. However, there are serious business risks associated with greenwashing and specifically climate-washing. The heightened urgency of climate action and the demands of consumers, investors, and policymakers are difficult to ignore. Paying lip service to these demands can hurt businesses in the long run. While greenwashing has been around for decades, the number of companies making false environmental claims has risen significantly in recent times, increasing the incidence of them getting called out for misleading claims.

Regulations on climate-washing have been catching up with industries that have aggressively marketed their products as sustainable. While well-informed consumers in developed and emerging markets increasingly purchase sustainable products and brands, the average consumer is vulnerable to misleading statements by advertisers. This is where regulators and non-profits are stepping in, with investigations and litigation, to keep businesses in check, as highlighted in the following examples.

Fast Fashion Industry Entangled in Accusations

In the UK, the Competition and Markets Authority (CMA) announced, in July 2022, an investigation into the environmental claims of three fast fashion companies – Asos, Bohoo, and George at Asda. The CMA will investigate several allegations related to the marketing initiatives of the brands, such as:

• The use of sustainable branding claims that are too broad or loosely defined
• Criteria used to define which products can be included in sustainably branded clothing lines – for instance, whether products that contain less than 20% recycled fabric are included
• Uncertainty over the coverage of fabric accreditation schemes and whether they apply to the specific products being marketed using the accreditations

This example underscores the importance of building robust ESG data management systems covering value chains to back-up claims and being more transparent with the claims. These companies may have several impactful sustainability initiatives but overselling a few of them without quantifying impacts could end up undermining their efforts and lead to a loss of investor confidence.

The Airline Industry Hit by Hot Air

Ryanair, a major European airline, launched an advertising campaign in 2019, claiming that it had Europe’s lowest fares and lowest carbon emissions. This campaign was launched after the company had been named one of the top 10 emitters in Europe (from any sector). The Advertising Standards Agency of the UK banned the campaign after concluding that the evidence for backing up Ryanair’s claim was outdated by eight years and conveniently lacked comparison with some major airlines in Europe.

In a more recent example, the Dutch aviation giant KLM faced legal action from environmental groups in May 2022 for allegedly misleading the public with its “Fly Responsibly” campaign, which had been running since 2019. The lawsuit came shortly after the Dutch Advertising Code Committee ruled that KLM’s ad tagline, “Be a hero – fly CO2 zero”, was not backed up with evidence. While KLM had been investing in reforestation activities in Panama, it failed to prove that the CO2 removals it enabled are adequate to make claims of carbon neutrality.

To be fair, the aviation industry is recognized as a hard-to-abate sector, and the technology to achieve net zero emissions will take time to develop. Therefore, even small steps in the direction of decarbonization need to be encouraged. However, when there is an overemphasis on offsetting programs or relatively small initiatives are decorated with exaggerated claims, it can end up landing airlines in hostile territory.

Financial Institutions Questioned on Investment Strategies

Interest in ESG funds has seen unprecedented growth in recent years. This has led to a deluge of investment products marketed as sustainable or net-zero. Without clear guidelines on labeling such investment products, questions have been raised about whether the funds support sustainable activities or re-package standard funds in the markets.

In response to these questions, regulators across geographies, including the US, UK, Europe, and Singapore, are introducing rules on labeling sustainable investment products. The typical ways in which regulators are addressing greenwashing risks include mandatory disclosures on sustainability-related investment approaches, information on ESG assessments or engagement methodologies, and recommendations related to independent verification.

Given the pivotal role the financial sector plays in enabling climate transition, there is increasing scrutiny by non-profits and regulatory watchdogs. For example, a report jointly published by the Rainforest Action Network and other non-profits called out leading global banks for continuing to finance the fossil fuel industry expansion despite their net-zero commitments. The report underscores the need to align investment strategies with the public commitments made by banks.

How Can Greenwashing Risks be Better Managed?

Despite regulators introducing guidelines to outline what businesses need to do to make credible claims, the chaos of greenwashing is likely to persist in the coming years. This is harmful not only to companies but also to consumers and investors. Making informed consumer or investment choices is significantly more challenging with the prevalence of greenwashing.

To manage the reputational risks accompanying environmental claims, businesses and institutional investors may benefit from focusing on the following –

• Capacity building: It is essential to educate the board members and the employees within a business on greenwashing risks, trends, and regulatory developments.
• ESG governance: Getting leadership to take ESG risks and opportunities seriously is a prerequisite for allocating resources to close the gap between business strategy and ESG goals. Furthermore, every function, including marketing, procurement, HR, risk management, and operations, must have well-defined roles and responsibilities aligned with the company’s ESG goals.
• Collaborating for data exchange: There is a need for collaboration and exchange of information with external stakeholders such as suppliers, customers, or industry associations. Applications to continuously update and seamlessly integrate ESG data from multiple external sources are also an important piece of the puzzle.
• Integrating sustainability and financial data: Business decisions are based on regularly monitoring business performance indicators. There is a need to upgrade ESG data management systems to match the pace of data generated for business decisions. For instance, applications associated with project proposals and budgetary approvals must include ESG considerations.
• Sentiment analysis: With the increasing frequency of communications on ESG and sustainability interactions with investors, there is an opportunity to leverage sentiment analysis to track how stakeholders perceive the strategic initiatives of a business. Such insights can give continuous feedback to business leadership and identify red flags when a recurring sustainability concern requires attention.

Balancing Opportunity and Risk

Clear business opportunities are created via market forces that demand more sustainable products and consumers who want businesses to manage existential threats to the planet. Such opportunities present an idealistic scenario in which companies can grow their numbers while also managing societal expectations and existential environmental crises.

There is, however, a catch. A strategy of endless growth may not always be compatible with a net zero goal or sustainable product claims in the absence of disruptive or, at least initially, painful systemic changes. A mismatch between business strategies and the noise created by companies can lead to severe reputation and financial repercussions. Mitigating these risks is as important as grabbing the opportunities presented by the market.