What dirty laundry? The problem with greenwashing

This blog has been informed by discussions with the A4S Expert Panel as well as the insights A4S accesses through our extended networks and technical experience. We would like to thank members of the Expert Panel for their contributions.

What is greenwashing?

Greenwashing takes place when companies misrepresent – whether on purpose or not – their sustainability credentials and performance. There are an increasing number of examples of companies being held to account for misleading claims, regardless of intention, by regulators, consumers and others. Some are branding greenwashing as a type of fraud.

In practice, greenwashing can take a range of different forms. It includes:

• Claiming that activities or products are sustainable when they’re not
• Promoting activities and achievements as sustainable when their impact is relatively minor
• Celebrating only the positive social and environmental impacts of activities despite those activities also producing negative social and environmental impacts

Carbon Tracker’s report the Greenwashing Hydra lists even more types of greenwashing, referring to the six shades of green: greenhushing, greenrinsing, greenlabelling, greenshifting, greenlighting and greencrowding; giving a sense of the emerging nuances and increasing sophistication of misleading environmental claims.

While the term greenwashing can often be used for wider sustainability considerations, the focus of this blog is on environmental and climate-related claims.

Why does greenwashing happen?

Growing awareness of the climate crisis and the need for urgent action across the economy has placed ever more emphasis on what companies are doing to reduce greenhouse gas (GHG) emissions. Consumers, investors, regulators and civil society are all putting increasing pressure on companies to act. In response, companies may choose to inflate their actual achievements in reducing emissions.

“Without tangible reductions in emissions or increases in biodiversity then the scale of action now reported across business is always going to be labelled, at least partly or on average, as greenwash.” – Aled Jones, Director, Global Sustainability Institute, Anglia Ruskin University

An increasing array of sustainability reporting standards and guidance – through initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD), the Taskforce on Nature-related Financial Disclosures (TNFD) and the International Sustainability Standards Board (ISSB) – has also created new expectations for companies’ climate and sustainability disclosures. In the scramble to keep up with new guidance, even well-intentioned companies can find that expectations for their disclosures outstrip their capacity to meet them.

“As sustainability reporting matures, finance professionals are being pulled into an unfamiliar reporting space. Their own professional training likely didn’t include sufficient content on what’s being asked of them in today’s reporting environment. This creates an inherent risk around competence and therefore error.” – Helen Slinger, Executive Director, A4S

Beyond reporting, many companies appreciate the pressing need to reduce emissions in their value chain and recognize their role in supporting a shift to a net zero economy. To become better positioned to reduce emissions and to produce robust climate and broader sustainability reporting, more organizations than ever before are therefore seeking finance professionals with expertise in sustainability. Whatever their motivations, companies seeking to build internal capacity are running up against a skills shortage. Without a combination of finance and sustainability skills in-house, the quality of both climate action and climate disclosures suffers.

Greenwashing is an increasing concern in the financial markets too, where there has been an exponential increase in the number of sustainability-related products on offer for clients. Investors, rightly, are looking to align their portfolios to a sustainable future and so are choosing to direct capital towards assets with higher sustainability ratings. Regulation over sustainability-related disclosures is also growing, along with demand from asset owners to reflect properly climate-related risks and opportunities in investment decisions. This creates incentives for financial institutions to develop new offerings or use sustainability claims, in the hope of appealing to investors and gaining a commercial edge.

“Sustainable investments … are attracting assets at a much greater rate than non-sustainable/ESG funds. This has meant that there is pressure to promote or exaggerate the sustainable/ESG credentials of funds, without providing any evidence, and therefore mislead investors for commercial gain.” – Will Oulton, Responsible Investment Advisor to First Sentier Investors

In a rush to bring sustainability-related offerings to market, there is a sense that some institutions may be placing more weight on packaging products as ‘green’ or ‘sustainable’ than developing truly sustainable products or making their own investment processes more climate-resilient. Concern about the greenwashing of investment products was the basis for a recent consultation by the Financial Conduct Authority.

How big is the problem?

A 2022 Harris Poll survey found that 58% of C-suite executives think their companies engage in greenwashing, despite considering sustainability a priority. The figure was even higher – 68% – for executives in the United States.

In the capital markets, nearly four-fifths of financial advisers and wealth managers surveyed in research by the Association of Investment Companies supported ESG investing, agreeing that “investments should make a positive difference as well as a financial return”. At the same time, though, there was widespread distrust of sustainability claims by funds, with only 1% of respondents reporting that they “completely trust” such claims. In an earlier Schroders survey, 60% of the 650 institutional investors who were polled flagged greenwashing as a key challenge to sustainable investing – making greenwashing the biggest challenge identified in the survey.

What’s the impact of greenwashing?

By misleading stakeholders about its environmental impact, a company can cover up a lack of, or insufficient, action on climate change. When this behaviour is widespread, the risk is that we collectively fail to reduce emissions by the levels needed to meet the goals of the Paris Agreement – a failure that will have far-reaching consequences for the planet and society.

Organizations face significant consequences too. Greenwashing reduces the trust that customers, investors, funders and employees have in an organization. Loss of trust from each of these groups can have a direct impact on income, access to finance, and the ability to attract and retain staff and customers – and ultimately reduce market share. There is also the risk of penalties and litigation, as regulators and legislators heighten their efforts to combat greenwashing.

As well as these external impacts, greenwashing can take companies’ attention away from identifying and acting on their climate-related risks and opportunities. Where this is the case, companies will be less prepared to adapt to a changing operating environment and to take advantage of commercial opportunities. They also risk being caught unawares by, and underprepared for, new regulations.

Meanwhile, in trying to distinguish between greenwashing and the ‘real deal’, consumers are left with confusion. According to a report by Deloitte, consumers are putting less faith in companies’ social and environmental claims in general, despite a desire to reduce their own climate impact through their purchases. Deloitte’s findings indicate that greenwashing affects consumers’ ability to make climate-friendly choices at a time when urgent action is needed at every level.

For investors, greenwashing reduces their ability to gauge whether the ESG credentials of an initiative, product or fund are legitimate. This has a knock-on effect on investors’ understanding of their exposure to climate-related risks and their ability to produce good-quality disclosures. A broader loss of trust could start to reduce flows of capital into ESG financial products – even where claims are genuine.

What about greenhushing?

Greenhushing takes place when companies minimize their communications on their climate and sustainability activities. This might be to avoid greenwashing or from a fear of being perceived to be greenwashing. Although Planet Tracker has argued that this approach could also be used as a more sophisticated form of greenwashing.

“Greenhushing may arise when a new or innovative initiative has some great upcoming merits, of interest to stakeholders, but that companies are nervous to share because they want to avoid overclaiming.” – Helen Slinger, Executive Director, A4S

One area where greenhushing could have the greatest negative impact is if it reduces the scale of corporate ambition. Setting ambitious goals publicly can act as a catalyst for innovation and action. However, in many cases, organizations set goals that they don’t know whether or how they will achieve. If a fear of being accused of greenwashing dilutes these goals, the pace of change towards net zero may slow. There are also other downsides from greenhushing. The underreporting of companies’ climate achievements makes the situation for investors and consumers even less clear. It also reduces the number of positive examples of climate action and reporting available for organizations that want to improve in these areas.

Standards and transparency play a clear role in helping to combat greenwashing as well as giving confidence to companies in reporting on their sustainability goals and performance. Our Reporting Insights Series provides a useful starting point. The four briefings in this series include an overview of current approaches to sustainability reporting and practical ideas for strengthening your own reporting. Explore this series for insights into sustainability reporting governance, materiality and metrics, data collection, and reporting frameworks and standards.