Greenwashing in the spotlight

Sustainability has been one of the key themes in investing in recent years, and it is going to become more central in years to come, as governments, companies and investors work to create a net zero economy by 2050.

But even as companies start tackling the environmental, social and governance (ESG) issues we have discussed elsewhere, another phenomenon is emerging – greenwashing.

The impacts on businesses of climate change such as water shortages, floods, drought, wildfires and rising sea levels are becoming clearer every year. A number of businesses and investors have enthusiastically embraced the challenge of addressing these impacts, some remain resistant to changing the way they have operated successfully for years, and the majority will be somewhere in between – keen to do the right thing but at the same time wanting to do the minimum that is required of them while they get on with running their companies.

At the same time, most companies are eager to jump on the green bandwagon and claim that their product is sustainable. Some of them clearly are – renewable energy providers, electric carmakers and producers of LED lightbulbs, for example, can all point to clear evidence that their products reduce emissions.

But others use environmental claims in a misleading way in an attempt to improve their image and ride the sustainability wave without really changing their behaviour. This can lead to “greenwashing”.

Mismatch between claims and reality

Greenwashing creates a mismatch between what companies claim and what they are actually doing as they attempt to jump on the sustainability bandwagon. This can take a number of forms. There can be out and out dishonesty – in the “dieselgate” scandal, carmakers touted the fuel efficiency of their diesel cars, but these claims were based on tests that they cheated in and the companies were fined billions of dollars.

Then there are the claims that are technically true, but irrelevant or distracting from other issues. So, a soft drinks company might claim that its products are vegetarian, while failing to address the plastic pollution caused by its bottles. Another ruse is to highlight your virtuous behaviour but fail to mention that you are only doing it because you are legally obliged to do so. Carmakers in Europe point out that their cars are getting greener, for example, but are curiously quiet about the huge fines they face from the European Union if they don’t meet legally mandated targets.

There can be a focus on a single, green part of your business while ignoring the rest – fast fashion brands have come under fire for developing Conscious lines, while oil companies have come under scrutiny for focusing their advertising highlighting that they are spending millions of dollars on renewable energy while neglecting to point out that they spend billions on extracting and selling fossil fuels. Worse still, campaigners have claimed in court cases that companies such as ExxonMobil have known for years about the damage climate change can cause and hidden that from consumers and investors, although many of these cases have been dismissed.

Sometimes, there is an effort to shift responsibility – there was a furious response recently when a petroleum company sent out a tweet asking: “What are you willing to change to help reduce emissions?” US congresswoman Alexandra Ocasio-Cortez replied acidly: “I’m willing to hold you accountable for lying about climate change for 30 years when you secretly knew the entire time that fossil fuels emissions would destroy our planet.”

Damaging trust

In some instances, it is simply lazy or misleading marketing – using the phrase eco-friendly or putting a picture of a mountain spring on a bottle of water. In some cases, this is harmless, but it can do real damage and reduce trust in products that are genuinely sustainable.

“Pervasive greenwashing has created an atmosphere of distrust between brands and citizens, who are increasingly keen to align their spending to their values. Whilst the market for ethical consumption stood at over £41 billion in the UK alone in 2018, shoppers are sceptical about the environmental claims being made about products,” says Abbie Morris, CEO of Compare Ethics. A survey for the group reveals that 83% of consumers feel misled by green and sustainable claims in advertising.

Not all of this is deliberate or malicious. Companies face a number of challenges. If they are doing something good for the environment, they justifiably want to talk about it. But if it runs counter to what the rest of the business is doing, then it will backfire unless it is part of a genuine change in strategy rather than a cosmetic add-on. Your message needs to align with your core strategy – and if the message you want to convey is how green your business is, then it is the business that needs to align with the message rather than try to shoehorn a green campaign onto an unsustainable product.

In today’s social media-dominated, transparent world, there is no hiding place and apparent hypocrisy can go viral globally in a matter of hours. And while this is often justified, that’s not always the case. Sometimes there are genuine differences of opinion on what is the right thing to do. But if you exaggerate the benefits of your product, you can find yourself on the defensive before you realise it.

It’s not just information that is speeding up – the world is changing at an ever-faster pace and that means new risks can emerge more quickly than companies are able to react to them. Claims can be entirely accurate in one context but can ignore, or even inadvertently highlight, other issues. Makers of electric vehicles can rightly claim that their products reduce carbon emissions and local air pollution – but their products do nothing to tackle city centre congestion and they will come under fire for that in future.

But at the same time, allegations of greenwash can arise precisely because a company is trying to become more sustainable. This takes time – it took Danish energy group a decade to move out of fossil fuels and become a renewable energy powerhouse – and during the transition, there will inevitably be a conflict between where you’re coming from and where you’re going.

How does greenwashing affect shareholders?

If greenwashing makes a company’s products appear greener than they are, it creates risks to that company’s performance and therefore to shareholder returns. This is not just because of the dangers of being exposed on social media.

There is also a growing swathe of regulation to tackle the problem. Both the UK and the EU are introducing anti-greenwashing rules, with the EU’s Green Taxonomy set to define what constitutes a sustainable investment.

But there is another reason shareholders should want companies to avoid greenwash – those that have truly committed to the green transition will be better prepared for the changes that are coming, more resilient in the face of those changes and more successful in the long term as a result.