ESG and the increasing risk of greenwashing
Accusations of greenwashing – a term which refers to unsubstantiated, misleading, or incomplete assertions regarding a company’s environmental performance – have been on the rise in recent years, illustrated by a steep increase in greenwashing litigation and regulatory enforcement. In 2022 alone, 26 greenwashing cases were ruled in courts worldwide, with over 180 cases still pending trial.
But is the risk of greenwashing by businesses truly on the rise? And if so, why? This was the key question that attendees were invited to discuss at GoodCorporation’s latest House of Lords debate lunch.
Hosted by Lord Triesman, the debate was attended by senior business representatives from across multiple sectors. Lord Triesman welcomed participants to the debate and shared his insights into the importance of successfully embedding responsible management practices into business operations.
Silvia Pavoni – founder and editor of Sustainable Views at the Financial Times – was GoodCorporation’s guest speaker for the event.
Silvia opened the discussion by reminding participants that growing global concerns for social, governance and environmental issues have resulted in increased legislation which is bringing the concept of greenwashing into focus. Regulators are not only paying attention to the claims being made, they are also increasingly investigating, regulating, and sanctioning firms suspected of greenwashing. Litigation can inflict not only harsh reputational damage on companies but also heavy fines or damage claims as we have seen with some of the recent high-profile cases across a variety of sectors and industries.
We are also seeing class actions being brought about by other stakeholders, in particular in relation to claims being made about carbon offsets. The lack of clearly defined frameworks regarding sustainability and reporting gives businesses leeway to choose what they disclose and how. However, it is fast becoming a high-risk strategy to make claims that cannot be substantiated.
Silvia also reflected on an emerging trend of under-reporting on sustainability issues or “greenhushing” as it has become known. This potential, unintended consequence of increased regulatory action presents a risk to improved sustainability if organisations move to de-prioritise their ESG efforts by choosing not to report or promote them.
Definitions can be part of the problem and there is a growing need for companies to make it clear what they understand by “ESG” in their commitments and reporting. Vague terminology and broad references to ESG could increase the risk of greenwashing as such claims can be difficult to substantiate with evidence and can increase the risk of appearing to mislead.
Despite concerns around reporting, the demands to get this right are here to stay. Companies will need to find a way of honestly and transparently tracking and reporting on their sustainability performance. While these corporate sustainability issues may be complex, ESG is becoming increasingly central to business considerations, and corporations must find a way of discussing and managing these issues effectively.
The debate discussion
Business representatives were asked whether they felt that greenwashing was on the rise, and how corporations could address it effectively.
Factors leading to a rise in greenwashing
- Attendees agreed that a poor definition of ESG and the lack of a clear reporting framework can push businesses to develop a “tick-box” mentality and increase the risk of making misleading claims. With more rigorous reporting requirements still in their infancy, businesses have been able to “mark their own homework” and report on selected information that depicts them in a positive light. This has pushed some businesses to tell only part of the story, resulting in increased cases of greenwashing, with accusations coming from consumers and regulators alike.
- The current breadth of methods and tools available for reporting ESG performance is also part of the problem and can give rise to both inadvertent or deliberate greenwashing. Inconsistent reporting methods can allow organisations to select which activities to report. To avoid allegations of misleading stakeholders, it is important for businesses to devise clear and consistent reporting systems that are transparent and, ideally, measurable by third parties.
- The desire to please has contributed to the increase in greenwashing cases. From a consumer perspective, the appearance of green credentials can drive sales (although the cost-of-living crisis may have tempered this). It has also become increasingly critical to highlight sustainability initiatives to meet the growing demands of investors. Companies need a more holistic and transparent approach to both evaluating and reporting on their ESG initiatives to avoid any risk of appearing to mislead.
- For some, there is still a need for more jeopardy and scrutiny in the system to properly deter companies from greenwashing. We need to get the right balance of carrot and stick. This applies to wider trading practices, with a growing awareness that making misleading claims can also have an impact on competition if misleading claims are perceived to be used to create a competitive advantage.
Have we reached peak greenwashing?
Some felt that we have reached peak greenwashing and that the combination of more stringent legislation and firm regulatory action has made organisations more aware of the risks. The following arguments were made: –
- Investors are increasingly knowledgeable about material ESG risks, placing claims around sustainability initiatives and activities under considerable scrutiny. Companies are aware of this and, as a result, are paying more attention to any claims being made.
- With allegations of greenwashing resulting in reputational damage, more organisations are evaluating their sustainability statements and claims as part of their overall risk management strategy and taking actions to avoid falling into a greenwashing trap.
- Boards too are increasingly aware that they are becoming accountable for ESG claims made and as a result are considering sustainability statements more carefully. While this may in turn lead to ‘greenhushing’, it is a sign that greenwashing may be on the wane.
The wider greenwashing debate
Companies should think beyond stakeholder pressure regarding their ESG commitments. While consumers and watchdog organisations are becoming more vigilant and calling for greater transparency and accountability from businesses in their practices, companies should also recognise that striving to be more sustainable is simply the right thing to do, to protect and preserve the planet.
ESG legislation on disclosures is both complex and broad, making it hard to capture all the subtleties of business practice. Many companies still struggle to understand what is required, how to report, which data to collect, how to interpret it, and what the requirements are. Regulators need to be pragmatic and allow for the journey that businesses are on and where possible work with corporates to drive rather than stifle change.
This applies more widely. We need to recognise that for some organisations the scale of the task is enormous and it may not always be right to impose sanctions because they have not completed the journey.
Third-party verification of data and claims is fundamental as this helps avoid allegations of greenwashing through the gathering of evidence and helps ensure that commitments made are matched by action.
Geographical considerations are a factor. Having in large part caused the sustainability challenges being grappled with today, can stronger, developed economies impose the same social and environmental priorities on emerging economies? There is a need to find a way to support a just transition that underpins the positive efforts of companies while enabling sustainable economic progress in developing markets.
It was also suggested that third-party verification can prove to be an effective barrier against greenwashing. However, it is also important to remember that verifications and labels are often not robust enough and companies should seek to go beyond certification.
In addition, company culture is fundamental to reduce the risk of greenwashing. Fostering a culture of transparency and willingness to improve is essential.
The GoodCorporation view
It is important for companies to take greenwashing seriously. This requires both top-down and bottom-up commitment. Senior management should take the lead, showing ownership for the organisation’s ESG commitments and goals. Claims need to be substantiated and backed by verifiable evidence, which can be checked by third parties and measurable to demonstrate improvement over time. It is also important to avoid setting unattainable goals. Being clear about what can be realistically achieved with a set baseline and timeline is essential. This helps deliver clear and transparent reporting which will meet the more stringent emerging requirements. As with most transitions, it will be important for all stakeholders to journey together. Training and engagement are therefore critical, as is ensuring that all greenwashing risks are regularly monitored and reviewed.