What is greenwashing?
As consumers and investors are becoming more interested in the environmental, social, and governance (ESG) impact of companies, the threat of “greenwashing” grows more prominent. Greenwashing is defined as “disinformation disseminated by an organization so as to present an environmentally responsible public image.”
Living in today’s information age means that consumers expect to have access to pertinent information about companies they support. Many consumers are not interested in financial statement data, because they’re not investors, but would rather know about ESG-related information such as environmental impact, supply chain sustainability, and how stakeholders are considered. For this reason, companies have an interest in making themselves look as environmentally friendly as possible, often for marketing reasons.
Although greenwashing might sound as if it only refers to companies pretending to be environmentally friendly, this practice also relates to companies that present misleading claims about their social practices within the company, supply chain logistics, and security of information.
Here are some examples of greenwashing.
- An airline that claims to be carbon neutral, but actually plans to meet this goal in 2100.
- A manufacturer changes packaging for cost-reduction purposes but markets the change as a decision made to cut waste.
- A brand that has made no change to be more environmentally friendly updates packaging to show trees, flowers, and other natural landscapes.
- A company claims their products are made by employees who are fairly paid but, upon closer inspection, the company sources materials from locations that utilize child and slave labor.
ESG reporting standards stand as a barrier to greenwashing and the temporary benefit it can create for companies. Ideally, ESG reporting standards would encourage companies to report ESG-related improvements, operate in sustainable ways, improve the lives of employees and other stakeholders in the value chain, and govern themselves with more transparency. Deceptive greenwashing impedes socially-concerned investors and consumers making data-backed decisions regarding how to invest and spend their money.
Why does it make good business sense to avoid greenwashing?
Starting in 2021, the SEC has shown more of an interest in cracking down on greenwashing. Because the SEC sets rules for filings for public companies, it can determine how public companies talk about their ESG metrics within official filings. Among others at the SEC, Chairman Gary Gensler has an interest in ESG claims made by public companies and how to ensure investors are not being misled.1
More evidence of this increased scrutiny is the announcement of the creation of the ESG Task Force within the Division of Enforcement of the SEC. The initial focus, according to the announcement2 in March 2021, is to “identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.” Although climate disclosures are not yet required in the 10-K filing, the SEC has required3 that companies consider the following climate-related risks:
- the impact of pending or existing climate-change related legislation, regulations, and international accords;
- the indirect consequences of regulation or business trends; and
- the physical impacts of climate change.
Although the SEC does not have jurisdiction over non-public companies, companies that could potentially go public in the future, or be acquired by a public company need to be aware of this increased scrutiny into ESG claims.
The Federal Trade Commission4 (FTC) has Green Guides,5 most recently updated in 2012, that include the following:
- “General principles that apply to all environmental marketing claims;
- How consumers are likely to interpret particular claims and how marketers can substantiate these claims;
- How marketers can qualify their claims to avoid deceiving consumers.”
This article is not meant to include all legal aspects of greenwashing, but the FTC has jurisdiction in this area and companies should be aware of that. A wise company would do well to reference the Green Guides to ensure compliance for consumer products.
The FTC received a complaint in March 2021, filed against Chevron for allegedly using “unlawfully deceptive advertisements which overstate investment in renewable energy and its commitment to reducing fossil fuel pollution.” This complaint comes as the first petition for the FTC to use their Green Guide guidance against a fossil fuel company. Chevron has doubled down on their claims of environmental improvements after the complaint, stating that the company is “taking action to reduce the carbon intensity of our operations and assets, increase the use of renewables and offsets in support of our business and invest in low-carbon technologies to enable commercial solutions.”6 It remains to be seen what will happen to Chevron, but companies should be aware of the power that the FTC has to enforce regulations to prosecute greenwashing.
Another reason to avoid greenwashing is because of customer and community pressure. Americans are increasingly aware of the environmental impact of products and some can spot greenwashing from a mile away.9 Through the power of social media, companies revealed to have engaged in greenwashing can be instantly exposed to millions of potential customers.
Consumers are willing to stop supporting brands that engage in greenwashing. An article by The Drum summarized findings from research done by Dentsu International and Microsoft Advertising:
Mounting consumer activism is evidenced by an overwhelming 91% of the public wishing to see brands ‘show by example’ and demonstrate the actions they are taking to support the planet. No less than 45% are willing to consider alternative brands and services to make this happen.10
Consumers that are unconvinced by a company’s efforts to help the planet are likely to support different brands. The power that consumers have to boycott brands and companies can be as scary as an investigation by the SEC of FTC.
How to avoid greenwashing
Today is the day for companies to decide to avoid greenwashing. The SEC, the FTC, and consumers are Companies, especially those looking to go public, should prioritize setting up policies that encourage ESG reporting metrics for altruistic or compliance reasons, not just as a marketing ploy. The following ideas can help any company know what to do and what to avoid.
Work with stakeholders:
The concepts of ESG reporting and stakeholder capitalism go hand in hand. A main idea of stakeholder capitalism is that stakeholders such as workers, suppliers, the community, and the planet are equal in importance to shareholders. In order to avoid greenwashing, a company could ask key stakeholders for ideas on ways to improve. After gaining an understanding of the stakeholders’ desires, the company could implement the ideas with goals and metrics. Genuinely advertising what stakeholders are looking for could be a good way to avoid being seen as engaging in greenwashing.
Focus on your story:
Be honest about where you’ve been, where you are, and where you’re going. “Green” isn’t something achieved overnight, and everyone understands that. There’s no need to misinform consumers and investors because they’ll likely understand that progress and sustainability take time to achieve. The difficulty is that some consumers and investors appreciate lofty goals, and others don't. Some investors may want to see that an airline has a goal of being carbon neutral by 2100, while others may think of it as greenwashing to even make a claim like that given that the goal’s distance indicates the speculative nature of such a goal. The line can be gray between greenwashing and communicating honest goals, but companies with good intentions will be recognized.
Create verifiable claims:
Use precise words and avoid ambiguity. Words such as “natural,” “eco-friendly,” and “clean” don’t have precise definitions. They’ve long been used as a way to make people feel good about the products they are using without the company being required to actually change anything. As greenwashing becomes more understood, companies will need to be clearer about claims. For example, be unambiguous and precise in messaging if you change products to be more biodegradable or to be more ethically sourced.
Certifications can show investors and consumers that your company is serious about ESG claims. The following certifications can help set your company apart from companies that greenwash:
- International Sustainable Business
Have proper measuring metrics:
Different reporting frameworks exist to measure ESG metrics. Some are more robust than others. IPOHub has a great resource on choosing a reporting framework;11 a list of common reporting frameworks are the following:
- The UN’s Sustainable Development Goals (SDGs)
SEC Commissioner Gary Gensler is quoted as saying: “Disclosure helps companies raise money. It helps the efficient allocation of capital across the market. And it helps investors place their money in the companies that fit their investing needs.”12 Greenwashing stands in the way of an efficient market in which some investors sincerely wish to channel their investment capital to ESG-focused companies. Companies should avoid misleading investors and consumers to avoid problems with the SEC, FTC, or with the consumers of products and services. Companies that want to avoid greenwashing should consider and remember these ideas:
- Work with stakeholders
- Focus on your story
- Create claims that can be verified
- Get certifications
- Have proper measuring metrics
- The Federal Trade Commission is a government agency originally created in 1914 that is entrusted with protecting consumers and enforcing antitrust laws. Greenwashing regulation comes from their duty to protect consumers by verifying claims.