Some companies have long sought to mislead the public about their commitments to sustainability, but greenwashing has become more widespread and sophisticated in recent years. Now regulators and investors are fighting back.

As the advert begins, the camera pans to a ship silhouetted against a lilac sunset. The narrator speaks in soothing tones: “Recently, DuPont announced its energy unit Conoco would pioneer the use of double-hulled oil tankers in order to safeguard the environment….” There follows a montage of jubilant wildlife, sound-tracked to Beethoven’s Ode to Joy: a sealion claps its fins, penguins slide over ice floes, orcas cavort in delight.1

Dupont’s so-called “applause” advert, which ran in 1991, is a notorious example of greenwashing – the practice by which companies misrepresent their environmental credentials for commercial or public relations purposes. At the time, Dupont had equipped only two of its oil tankers with the reinforced hulls cited by the narrator. More to the point, it was responsible for more pollution in the mainland US than any other company.2

Greenwashing has become more subtle and sophisticated in recent decades

Greenwashing has become more subtle and sophisticated in recent decades, but it remains a significant problem. In January 2021, the European Commission teamed up with national consumer agencies to undertake a sweep of corporate websites across the continent. It found 42 per cent of all green claims in European companies’ marketing materials were exaggerated, false or deceptive.3

Thomas Tayler, senior manager at Aviva Investors’ Sustainable Finance Centre for Excellence, argues the persistence of greenwashing brings significant risks for consumers and investors alike. “If we cannot rely on the information that companies or product providers put out about their sustainability credentials, the integrity of the market is compromised,” he says.

It all comes out in the greenwash

The term “greenwashing” was coined in 1986 by American environmentalist Jay Westerveld, after a visit to a tropical resort. The hotel left notes in guest rooms asking them to “help us help the environment” by re-using towels, even as it was building new tourist bungalows over threatened coral reefs.4

Consultancy TerraChoice identified “seven deadly sins” of green marketing

Greenwashing comes in a variety of shades. In 2010, the consultancy TerraChoice conducted a study of US retail companies, identifying “seven deadly sins” of green marketing. These included a lack of evidence for green claims; vagueness; irrelevance; outright lies; exaggerations; hidden trade-offs; and the “lesser of two evils” argument, which sees companies argue for the environmental benefits of fundamentally polluting products, such as cigarettes or crude oil.5

More recently, researchers have identified a separate category, “executional greenwashing”, whereby companies market themselves with nature-related colours and imagery to evoke an “ecological” impression. Research suggests this can mislead consumers as to the sustainability of a particular product or service, even if no explicit environmental claims are made.6 Think of bottled-water companies that advertise themselves with images of mountains and crystal-clear rivers, despite generating millions of tonnes of plastic waste each year.

Companies have spotted a commercial opportunity amid rising awareness of ESG issues among consumers

One reason for the persistence of greenwashing is that companies have spotted a commercial opportunity amid rising awareness of environmental, social and governance (ESG) issues among consumers.

US market research firm Nielsen has found 66 per cent of people are willing to pay higher prices for environmentally friendly products, especially when they are buying from a firm they deem socially responsible.7 In Europe, the Consumer Market Monitoring Survey found 78 per cent of customers consider the environmental impact of products to be “very important” or “fairly important” factors when making a purchase.8

Litigation risk

But greenwashing is risky; companies (and governments) making false claims may find themselves subject to legal action from consumer-rights organisations or other groups. On climate alone, the number of litigation cases has almost doubled from 884 to 1550 since 2017 (see Law and climate disorder for an in-depth look at litigation risk).9

In December 2019, for example, non-profit legal specialist ClientEarth filed a complaint about BP’s “Possibilities Everywhere” advertising campaign, alleging it broke the Organisation for Economic Cooperation and Development’s consumer guidelines for multinational enterprises. ClientEarth argued the advert’s soft-focus visions of solar-panel installations and purring electric vehicles gave the impression BP was a renewable energy company, despite the fact it still devotes 96 per cent of its spending to oil and gas projects. With the case still pending, BP pulled the campaign the following year.9

New regulation could make greenwashing more difficult. The European Commission is set to introduce rules to police green marketing on consumer-protection grounds as part of its 2020 Circular Economy Action Plan: two new pieces of legislation, including an initiative to force companies to substantiate green claims using standardised methods for quantifying them, could come into force in 2021 as part of a package of measures designed to support the green transition.11

Meanwhile, the US Securities and Exchange Commission (SEC) has stepped up its efforts to combat greenwashing under the new Biden administration. The SEC has established a new enforcement unit to specifically target companies that do not fulfil regulatory requirements on climate-related risk disclosures.12

Investment risk

While regulation to clamp down on greenwashing is welcome, asset managers have a key role to play in fighting back against the practice, says Jaime Ramos Martin, portfolio manager of Aviva Investors’ Climate Transition Fund.

“Some companies are good at getting high ESG scores even if the reality is different. It’s part of our job to push back and gauge whether those claims stand up. When companies tell a rosy story about their revenues and margins over the next five years, investors ask tough questions and try to get at the truth of the matter – they should be doing the same when companies assert their green credentials.”

Some companies are good at getting high ESG scores even if the reality is different

Asset managers have an obvious incentive to ensure the companies they invest in are backing up their green claims. Greenwashing can result in reputational damage, regulatory fines and a sizeable impact on an investee company’s share price.

In September 2015, carmaker Volkswagen was found to have been rigging “Clean Diesel” vehicles to cheat carbon emissions tests. The company’s shares fell 22 per cent on the day the news broke and, as of 2020, it has paid over €31 billion in related fines and settlements.13 VW has since sought to address the governance issues that led to the scandal and is now among the firms leading the transition to electric vehicles.

In a more recent case, Italian oil company Eni was fined €5 million by the country’s antitrust regulator in January 2020 after running a marketing campaign that presented its palm-oil derived “Diesel Plus” biofuel as having a positive impact on the environment, without mentioning the links between palm oil and deforestation. The watchdog also found the advert’s claim the fuel reduced emissions by 40 per cent compared with conventional diesel was misleading.14

Given the financial consequences of greenwashing, perhaps it is no surprise short sellers have begun to scout out firms they believe to be exaggerating their ESG commitments. Their targets are often companies touting the environmental benefits of new technology: in 2020, short seller Hindenburg Research raised concerns about Loop, a Canadian recycling company, and Nikola, a US-based electric truck firm. The latter stood accused of fake product launches, including a video implying a new truck could move under its own power, when in fact it was simply rolling down a hill. Though the companies denied most of Hindenburg’s allegations, their shares fell, and both have been under investigation by US authorities.15

Technology could play a role in enabling investors to expose and push back against greenwashing

Technology could play a role in enabling investors to expose and push back against greenwashing. A team of Swiss academics recently developed an artificial intelligence algorithm called ClimateBert, which discovered some companies were cherry-picking non-material climate risk data to meet the requirements of the Task Force on Climate-related Financial Disclosures (TCFD), the Financial Stability Board’s reporting platform.16

But from a due diligence perspective, there is no substitute for engaging directly with company executives to determine their commitment to sustainability. Whether or not such meetings reveal specific instances of greenwashing, they may highlight flaws in wider governance practices that point to potential problems in the future.

Scope for improvement

Blatant greenwashing is relatively rare. More often, companies will pledge their commitment to the green transition while lobbying against new climate regulation behind the scenes. Asset managers should be alert to such practices and engage with companies to put a stop to them.

“Asset managers should ensure companies’ public stance on issues like climate change is aligned with their strategies. For example, some companies will talk a good game but spend a lot of money lobbying policymakers to allow them to maintain an unsustainable status quo. Alignment of lobbying with science-based climate goals is one of the asks we have made of the most carbon-intensive companies we engage with,” says Tayler.

Alignment of lobbying with science-based climate goals is one of the asks we have made of carbon-intensive companies

In another, more subtle, form of greenwashing, companies may present themselves as supportive of the green transition while failing to look into their links to polluting activities further down the supply chain. At issue here are the “Scope 3” emissions associated with companies’ customers and suppliers, which can introduce overlooked climate risk into investment portfolios.

“Businesses that appear to have a small carbon footprint can be, in reality, much more exposed,” says Ramos Martin. “Companies need to look at their value chains and clients to fully grasp their risks. For example, European banks appear to have limited climate risk, but they enable most economic activity and are therefore exposed to plenty of climate risk.”

Emphasising the point, a recent report from Oliver Wyman shows that while around 95 per cent of European corporate lending comes from banks claiming to be committed to the Paris Agreement, less than ten per cent of European companies have Paris-aligned targets. Given that over 70 per cent of credit flow in Europe goes through banks, there might be substantially more climate risk in the system than is commonly assumed.17

Companies are increasingly taking advantage of rising demand by borrowing capital for green projects

This may also be the case in the fast-growing sustainable bonds market. Companies are increasingly taking advantage of rising demand by borrowing capital for green projects by issuing different categories of sustainable bonds, but the labelling on these instruments does not always tell the whole story. For instance, UK retail giant Tesco issued its first sustainability-linked bond in January 2021, which committed the company to paying a penalty if it fails to reduce its carbon emissions by 2025 against a 2015 baseline. But according to the small print, the terms of the bond only include Scope 1 and 2 emissions, not the Scope 3 emissions that account for almost a third of Tesco’s overall carbon footprint.18

Similarly, some energy companies have begun labelling their products as “carbon neutrally produced”. In April 2021, Swedish oil firm Lundin announced it had sold “the world’s first ever certified carbon neutrally produced oil”. But the company acknowledged the certification only included Scope 1 and 2 emissions from production, not the major Scope 3 emissions caused by the end use of the oil.19

Ripple effects

To ensure companies provide a clearer and more comprehensive picture of their exposure, both credit and equity investors can engage with them to adopt science-based targets for emissions reductions that incorporate Scope 3.20 Consumer goods giant Unilever is among the firms leading the way, having pledged to track and reduce the emissions associated with raw materials and customer use of its products (such Scope 3 emissions are estimated to account for 90 per cent of the overall footprint of the consumer goods industry).21

Companies’ procurement budgets tend to dwarf their direct spending on corporate social responsibility (CSR) initiatives (see Figure 1).2122), illustrating the potential impact of shifting to greener suppliers. Indeed, there are already signs companies that start pushing for emissions reductions across their supply chain can set off positive ripple effects, raising standards across economies.

For example, US tech giant Apple has set ambitious science-based climate targets that require it to green its supply chain; it is calling for its manufacturing partners to switch to 100 per cent renewable energy by 2030. Apple supplier Sony, having recognised it will be unable to meet these targets without greater availability of renewable energy in its home market, has consequently been lobbying the Japanese government to accelerate the transition towards renewables in the country.23

Figure 1: The average procurement budget of a FTSE 100 company is 400 times its spending on CSR
The average procurement budget of a FTSE 100 company is 400 times its spending on CSR
Source: Charlie Wigglesworth, Jennifer Exon, Neha Chandgothia and Andy Daly, ‘Buy social corporate challenge: Year 3 impact report’, Social Enterprise UK, 2019

Greenwashing in finance

If they are to speak with authority on greenwashing, asset managers also need to ensure their own house is in order. The rise in interest in responsible investment has led to concerns that some firms are branding themselves as sustainable investors without doing the necessary legwork to ensure their portfolios are ESG friendly.

Some asset managers have attracted controversy by including “avoided emissions” when calculating carbon footprints

ESG accounting practices among investors have also drawn scrutiny. Some asset managers have attracted controversy by including “avoided emissions” – hypothetical emissions that have supposedly been negated by the firm’s investments in renewable energy – when calculating their own carbon footprints. Climate experts at the Science Based Targets Initiative have deemed this a form of greenwashing.24

Regulators, meanwhile, are beginning to take a closer look at greenwashing in finance. The Sustainable Finance Disclosure Regulation (SFDR), which came into force in the EU in March 2021, imposes tougher requirements on the classification of investment products.

Under the new rules, funds are effectively categorised as ‘sustainable’ if they have binding sustainability controls in their investment process, or ‘neutral’ if they don’t. In addition, all asset managers are required to take sustainability risks into account and explain to investors how these are being managed. The idea is to integrate sustainability into all decisions, regardless of whether the investment product is branded with an ESG tag.

Tayler argues the high-level policy aim behind these measures – to promote clarity and transparency as to sustainability claims – is admirable. “There has been a significant increase in sustainable products over the past five years and not all the claims being made are consistent with the underlying investment strategy,” he says.

Managers will have to make two different sets of ESG disclosures under the new rules

But there have also been some criticisms of the new rules, which are complex and fit awkwardly alongside some other sustainability regimes. Most notably, Tayler argues SFDR is inconsistent with the EU Taxonomy, the European Union’s classification system for green investments. This means managers will have to make two different sets of ESG disclosures under the new rules. With further regulation in the offing – the UK’s Financial Conduct Authority is developing its own sustainable finance proposals that it says will “at least match the ambition of the EU”, with a focus on TCFD disclosure – it is to be hoped that sustainability reporting requirements will gradually become more aligned.

Momentum building

Nevertheless, the move to push companies and investors towards improvements in disclosure and transparency should give further momentum to the wider energy transition. Recent developments in the US are particularly encouraging. Under former President Donald Trump, the Department of Labor introduced rules that curbed the ability of shareholders to vote on proposals related to climate change. The Biden administration has made it clear these rules will no longer be enforced, which should empower shareholders to pass resolutions to combat greenwashing and hold companies to their pledges.

The change of approach at the SEC since President Biden’s election is already having an impact

“The change of approach at the SEC since President Biden’s election is already having an impact. The SEC has renewed its focus on sustainability in general, not just on greenwashing, but the announcement of the enforcement unit focused on climate risk disclosure is certain to impact companies’ approaches,” says Tayler.

While more needs to be done to tackle greenwashing, these are steps in the right direction and asset managers should benefit from regulators’ moves to increase transparency and expose climate risk. The fightback against greenwashing has begun in earnest. Thirty years after Dupont’s egregious “applause” advert, that should be cause for genuine celebration.


  1. Jack Doyle, ‘DuPont's disgraceful deeds’, Multinational Monitor, October 1991
  2. Jack Doyle, ‘DuPont's disgraceful deeds’, Multinational Monitor, October 1991
  3. ‘Screening of websites for “greenwashing”: half of green claims lack evidence’, European Commission, January 28, 2021
  4. Bruce Watson, ‘The troubling evolution of corporate greenwashing’, The Guardian, August 20, 2016
  5. ‘Sins of greenwashing’, UL
  6. Cristel Antonia Russell, Béatrice Parguel and Florence Benoît-Moreau, ‘Can nature-evoking elements in advertising greenwash consumers? The power of “executional greenwashing”’, International Journal of Advertising, February 2015
  7. Sebastião Vieira de Freitas Netto, et al., ‘Concepts and forms of greenwashing: a systematic review’, Environmental Sciences Europe, February 2020
  8. ‘Screening of websites for “greenwashing”: half of green claims lack evidence’, European Commission, January 28, 2021
  9. AIQ Editorial Team, ‘Law and climate disorder: Understanding physical, transition and litigation risk’, Aviva Investors, April 9, 2021
  10. ‘BP pulls advertising campaign just months after our legal complaint’, ClientEarth, February 2020
  11. ‘Initiative on substantiating green claims’, European Commission, 2020
  12. ‘SEC announces enforcement task force focused on climate and ESG issues’, US Securities and Exchange Commission, March 4, 2021
  13. ‘Volkswagen says diesel scandal has cost it 31.3 billion euros’, Reuters, March 17, 2020
  14. Eoin Bannon, ‘Oil major slapped with €5m fine for greenwashing palm oil diesel’, Transport and Environment, January 16, 2020
  15. Billy Nauman, ‘Short-sellers step up scrutiny of ESG stocks’, Financial Times, October 24, 2020
  16. Julia Anna Bingler, Mathias Kraus and Markus Leippold, ‘Cheap talk and cherry-picking: what ClimateBert has to say on Corporate Climate Risk Disclosures’, SSRN, March 2021
  17. ‘Running hot: accelerating Europe’s path to Paris’, CDP and Oliver Wyman, 2021
  18. ‘Tesco's first sustainability-linked bond more than six times oversubscribed’, Edie, January 21, 2021
  19. ‘Lundin sells its first “carbon neutral” oil as climate activism grows’, Reuters, April 27, 2021
  20. ‘Everybody wants one: Are sustainable bonds the new smartphones?’, Aviva Investors, March 5, 2021
  21. ‘Top FMCGs in race to keep up with conscious consumers’, CDP, February 25, 2019
  22. Charlie Wigglesworth, et al., ‘Buy social corporate challenge: Year 3 impact report’, Social Enterprise UK, 2019
  23. Kana Inagaki, Robin Harding and Leo Lewis, ‘Sony warns it could move factories over Japanese energy policy’, Financial Times, November 26, 2020
  24. Camilla Hodgson, ‘Carney’s stumble at Brookfield intensifies focus on “net zero” claims’, Financial Times, April 9, 2021

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