Greenwashing is conveying misleading or unproven claims about the positive environmental impact of a company’s product. A recent example is HSBC’s misleading advertisement which faced an immediate backlash. The banking giant rolled out an advertisement highlighting its $1 trillion investment in green initiatives. However, the Advertising Standards Authority noted the bank continues to make huge financial investments in industries emitting notable levels of carbon dioxide and greenhouse gasses. The regulatory body found the advertisement misleading and hence, ordered it to be taken down. There have been several similar examples of greenwashing in recent times including giants such as Walmart, Volkswagen, and H&M.
Let us understand the why’s and how’s of this new term swirling around the business world.
Why do companies engage in greenwashing?
To understand the root of the problem, let us understand why companies are choosing to participate in this practice.
- The urgency to take actions to tackle climate change is now bigger than ever. The consumer is aware and conscious while making choices. This has forced companies to make commitments and set ambitious targets such as ‘carbon-neutral’ or ‘net-zero emissions’. But it takes a lot of time, effort, and investment to implement changes to achieve these targets, leading companies to engage in greenwashing
- There is no way for consumers to verify a company’s claims and therefore, customers can be easily tricked into believing that the products are environmentally friendly. As a result, companies find it easy to publicize untrue claims to gain competitive advantage
- It is difficult to measure and quantify the impact of a climate initiative. There are no standardized metrics to evaluate and compare the impact. This leaves scope for manipulations
- There is a lack of regulatory policies and the new policies being put in place are not consistent across countries. This again leads to lack of a standard for reporting. Also, most of these disclosures are voluntary, leaving the discretion on the management on what to report and how to report it
How does greenwashing work?
But again, how do these companies actually do greenwashing? There can be uncountable ways, depending on how creative a company can get in identifying the loopholes and leveraging them. Here are some examples that might leave you pondering:
- Advertising false claims with no evidence: Tide marketing its detergent as 100% plant-based, when it is only 75% plant-based
- Initiatives taken by one segment of business are presented in a way leading consumers to believe that all the segment in the business are environmentally friendly: Mercedes-Benzpromoted its electric vehicles in a way that suggested that the company as a whole is environment conscious, whereas Mercedes is facing huge fines on emissions caused by its diesel vehicles
- Misleading branding using buzzwords: Bottling company claiming that the bottles are ‘environmentally friendly, whereas the lid contains a harmful substance
- Final product presented as environment friendly, disregarding the emissions caused in the production process. An example being, Burger King advertising one of its products as sustainable, while using packaging made of harmful substances.
What can be done:
While there is a long way to go, there are some suggestions that we can start with:
Firstly, regulatory policies need to be stringent and it needs to be done fast to outpace greenwashing. Strict laws and penalties need to be implemented to discourage such activities. FCA has taken some steps in this direction. The regulator has proposed to introduce the following measures:
- Sustainable investment product labels to help consumers choose the right product
- Restrictions on the usage of terms such as ‘ESG’, ‘green’, or ‘sustainable’
- Consumer-facing disclosures to help understand sustainability related features of an investment product
Regulators in other regions such as EU and US are also coming up with similar disclosures and policies. However, these need to be implemented at a faster pace. The next step in this direction will be to have sustainability and ESG related aspects included as part of the annual audit of companies. The regulators should make it mandatory for at least public companies to conduct an ESG audit and release a public report of the outcome. This will increase the accountability of the management towards the claims made by them in their press releases and annual reports.
Lack of publicly available data allows companies to publicize false claims. In order to curb this, a detailed reporting of funds invested in ESG activities should be made mandatory. For this, a standardized measure to evaluate ESG efforts needs to be formulated. Some organizations such as UN and PCAF have proposed disclosures and calculation methodologies. However, these are still optional to submit. These disclosures should be made mandatory to comply in order to increase transparency.
Apart from the regulatory actions, the consumer also needs to be made aware of the existence of such practices. They should be educated to spot such gimmicks and take action against them. They should be vigilant to look for evidence to support any ESG claims. Consumers should look for certifications rather than readily believing any product labelled as ‘Vegan’, ‘Environmentally Friendly’, or ‘Sustainable’.
Lastly, the companies, from employees to CXOs, also need to be educated on how to implement and publicize ESG initiatives to avoid any miscommunication to the public. The business world is changing, climate is changing, business practices are changing, consumer preferences are changing. In this ever-changing world, it has become crucial to implement corrective actions at a rapid speed to not let these practices begin in the first place.
Ritu Yadav (MBA 2024) spent five years in finance roles before enrolling in the MBA programme at LBS. During her five years’ experience, she primarily worked with the top global investment banks in multiple roles such as financial reporting, investment deal accounting, and financial advisory. She is passionate about sustainability, impact investing, and technological solutions to address climate change.
The Wheeler Institute is seeking to understand, illuminate and offer solutions to the challenges faced by the developing world, with an aim to identify the role of business in addressing these challenges and a focus on the implications and actions for those in developing countries. In support of our students, we approach this blog section as a reflective platform and a space where individuals can generate debate as long term agents of positive change.
Narender Singh Yadav