Greenwashing, whereby an organisation presents a misleading view of its sustainability credentials, has become more widespread and sophisticated in recent years. Now regulators and investors are fighting back.
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.1
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.2
Some companies market themselves with nature-related colours and imagery
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.3 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.
One reason for the persistence of greenwashing is that companies have spotted a commercial opportunity: the 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.4
Legal 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.
The European Commission is set to introduce rules to police green marketing
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.5
The authorities are also beginning to take a closer look at greenwashing in finance by making sure investment products described as “sustainable”, or environmentally responsible, are just that.
Investment risk
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 a company’s share price.
In September 2015, for example, the 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. Volkswagen 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.6
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. Artificial intelligence, for example, can be used to screen information and identify instances where companies are making potentially misleading claims.
Ultimately, however, large investors should talk directly with company executives to determine their commitment to environmentally-friendly practices.
The move to push companies and investors towards improvements in the information they provide should give a further boost to the wider transition to renewable energy. 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. This should empower shareholders to pass resolutions to combat greenwashing and hold companies to their pledges.
The fightback against greenwashing has begun in earnest
While more needs to be done to tackle greenwashing, these are steps in the right direction, and asset managers should benefit from moves by authorities to increase transparency and expose climate risk. The fightback against greenwashing has begun in earnest.
Three points to remember
- Greenwashing is risky for companies and investors; it can lead to reputational damage and the threat of litigation with adverse consequences for the value of an investment.
- Regulators are stepping up efforts to combat greenwashing, while new technology could also help identify wrongdoers.
- Large Investors should put pressure on companies to adopt more environmentally friendly practices.
