What is "Greenwashing"?
Today, consumers and investors are becoming increasingly focused on supporting sustainable businesses. The demand for sustainable goods has increased by over 71% in recent years, and companies are rapidly changing to keep up. According to a national survey conducted in a 2006 study, millennials are more responsive to institutions that are environmentally friendly. The results of the study showed that 83% of millennials will place more trust in an organization that is socially and environmentally responsible. Another study, conducted by the Mortgage Lender Network of the USA found that 94% of Americans prefer to work in a setting that is designed to be both energy efficient and ecologically sound. However, not all companies are truthful when it comes to claims regarding their increased devotion to sustainability. Lately, many companies have been accused of “Greenwashing”, or claiming to have greener funds and products than they actually do.
False advertising in marketing and investing means consumers and investors alike can fall victim to greenwashing. They purchase products and invest in companies they believe align with their values, when in reality, these companies are doing little to move towards more sustainable business practices. In 2021, The Economist found that, out of the world’s 20 largest ESG funds (or businesses claiming to enhance their sustainability using environmental, social, and governance factors), each one held investments in fossil-fuels producers, and others held stakes in oil producers and coal-mining. Additionally, 42% of websites selling consumer products were found to likely be making misleading or fabricated claims about the eco-friendliness of their goods.
Greenwashing has been an issue for decades, with the term being first coined in the 1980s. However, it has gotten much worse in recent years as consumers and investors have become increasingly concerned with supporting sustainability. According to Terrachoice, a private marketing and environmental consultancy, around 98% of companies claiming sustainability are actually guilty of greenwashing.
So why is this happening? Up until now, companies have been making incredibly vague commitments to fulfill ESG goals. They promise to be net-zero by a certain date, to diversify their boards, etc. but lack concrete goals and actions to achieve this. Unfortunately, we lack global standards for consumers and investors to evaluate the sustainability of a company. Now though, the SEC (Security and Exchange Commission) has begun cracking down and seriously investigating the claims of companies boasting sustainability goals. The SEC has proposed rules that require companies to report on how their operations affect the climate and contribute to carbon emissions. These rules will measure and display big companies’ direct greenhouse gas emissions and indirect emissions from upstream and downstream business partners. In September 2021, the CMA (Competition and Markets Authority) published a Green Claims Code providing regulations so companies do not make claims without following regulatory expectations. They stated that: claims must be truthful and accurate, claims must be clear and unambiguous, claims must not omit or hide important relevant information, comparisons must be fair and meaningful, claims must consider the full cycle of the product or service, and claims must be substantiated.
Greenwashing can be seriously detrimental to the reputation of a business, with the biggest risk being an erosion of trust between the company and its customers. Dr. Mischa Repmann, Senior Sustainability Professional of Swiss Re. stated, “Our stakeholders trust that we do what we say to the public, and if it turns out that there is nothing concrete following those words, the trust is gone and it's really hard to reestablish.”
There are several steps you can take to ensure you are putting your trust into a company that is genuinely committed to sustainability. Is the company going through a third-party to get certified that their products are environmentally friendly? Is the company actually allocating resources to achieve the goals they are announcing, or are they just trying to keep up with the claims of the competitors? If you put consideration into their answers to these questions, you are much more likely to invest in or buy products from a business that is truly committed to helping the environment. Companies should see how they can immediately limit their carbon emissions rather than setting hollow, long-term goals without taking tangible actions to reach them.