'Greenwashing' refers to exaggerating a company's commitment to the environment. In other words, companies who engage in greenwashing make misleading environmental claims about sustainability or overstate their positive impact on the environment.
Greenwashing seems to be becoming the fake news of the marketing industry.
For example, during the first Earth Day in 1970, corporations spent eight times more on establishing a green image through advertising than the amount they spent on environmental research initiatives. In addition, a recent study from the international consumer protection group ICEPN found as many as 40% of company claims about sustainability were misleading or overstated their impact on the environment.
Corporate greenwashing may sound like just another case of misleading advertising and too clever PR, but the results of greenwashing run much more profound and have global implications. For example:
- Companies who understate their negative impact on the environment hurt consumers and the community by allowing these negative impacts to continue unimpeded.
- Fake claims by companies who employ greenwashing hurt the reputation of competing brands trying to minimise their environmental impact. This, in turn, delays the latter's ability to implement robust environmental programs.
- Beyond consumption, greenwashing influences investors, governments, and communities to make environmentally harmful choices about priorities, projects, and their nations' future.
If the oil and gas companies, for example, were funding and putting in place the actions that they're talking about around environmental and social goals, if they were genuinely driving impact within their organisations to move in that direction, we wouldn't be in the climate catastrophe that we're in today.
For companies like Patagonia - the popular outerwear business known for its commitment to sustainability - greenwashing hurts the reputation of its brands by diverting customers to buy elsewhere and delays action seriously needed to address the climate crisis.
Jenna Johnson, the head of Patagonia's apparel division, recently told ABC News that even a company like Patagonia struggles to sort through greenwashing from potential suppliers and other companies claiming they follow the best practices for the environment.
"It happens a lot. There are a lot of really strong marketing claims and a lot of products out there that feel fantastic and like they're moving in the right direction in terms of responsibility. But as you dig in, you find sometimes that it's more talk than actual actions," she told ABC News.
Interestingly, Patagonia is transparent about the fact that it does not claim to be a completely green clean company. What Patagonia does claim is to be transparent about its environmental footprint and what it is doing to act on its social and environmental responsibilities to minimise that footprint.
86% of Australians expect their superannuation to be invested ethically
There is growing global unease about the risks arising from the corporate greenwashing of financial products – partly driven by a lack of clarity about labelling or a single generally accepted taxonomy in this area. This issue has been recognised by international regulators as well as the International Organization of Securities Commissions, which has established a Sustainable Finance Task Force that covers greenwashing and other investor protection concerns.
In Australia, a recent consumer research report, the Responsible Investment Association Australasia (RIAA) revealed that 86 per cent of Australians expect their superannuation or other investments to be invested responsibly and ethically. These investors are motivated by their personal values and, increasingly, by financial returns – 62 per cent of Australians surveyed believe ethical or responsible super funds perform better in the long term (up from only 29 per cent in 2017).
To meet this demand, Australian managed funds and superannuation funds (pension funds) are responding by offering investment products focused on environmental, social and corporate governance (ESG) considerations. However, the potential to mislead can arise easily - intentionally or unintentionally - due to the product issuer being unclear on what standards they use to assess the product as environmentally or socially responsible; or overstating green credentials that are not sufficiently reflected in their operations.
The challenge faced by the funds is similar to that faced by Patagonia in its struggles to verify the green credentials of its supply chain - it's difficult in an analogue world.
Financial fraud from greenwashing is attracting global regulation
For superannuation fund investors, the prevalence of corporate greenwashing means that they face the prospect of being fraudulently misled into investing in unethical funds and may also be financially worse off in the long term. Financial fraud is usually taken more seriously than consumer fraud.
This is why greenwashing has attracted the attention of corporate regulators across the globe. For example:
- The Australian Securities and Investments Commission (ASIC) is currently conducting a review to establish whether the practices of funds that offer these products align with their promotion of these products; in other words, whether the financial product or investment strategy is as "green" or ESG-focused as claimed.
- The European Union recently adopted a legal framework introducing a taxonomy that seeks to define which investments or economic activities can be considered sustainable or climate-friendly. The US Securities and Exchange Commission has also announced a task force to identify gaps or misstatements in ESG disclosures, as well as compliance issues relating to the ESG strategies of funds.
- And in the US, as the Biden administration continues to push for climate change to be a top priority more advocacy groups and businesses are honing in on greenwashing as a problem the government needs to address.
What is happening in Australia right now is a warning shot across the bow of Company Directors across the globe.
Clear and present danger for Company Directors - be clear or be sued
According to a legal opinion backed by some of Australia's top business leaders, Australian companies and their directors are on notice that they could be sued for greenwashing their commitments to achieve their net-zero carbon pledges or emissions reductions targets.
"Greenwashing on climate creates clear legal risks," leading Australian barristers Noel Hutley, SC, and Sebastian Hartford Davis warn company directors.
"Care needs to be taken to ensure that climate-related targets and analysis are rigorous, underpinned by appropriate governance, strategy and action, and reflected in financial statements as required."
Amid a growing business imperative to disclose to shareholders climate-related risks, Hutley and Davis warn that boards might be liable for "misleading or deceptive conduct" if they selectively disclose exposures to climate change or declaring green goals while lacking credible plans to achieve them.
The opinions have been backed by the Reserve Bank of Australia, the Australian Securities and Investments Commission, Australian Prudential Regulation Authority, the ASX corporate governance committee and the Australian Accounting Standards Board.
In addition, the Taskforce on Climate-related Financial Disclosures (TCFD) is now seen as the global standard for notifying shareholders of the climate-related risks faced by companies. In other words, boards need to meet the TCFD standard as a minimum expectation of corporate responsibility.
Grass-roots activism steps in where regulation is lacking
Aside from the increasing burden on companies to accurately report their green credentials and actions and be held accountable by regulators, direct legal action by grassroots activists is on the rise.
What is apparent is an uptick in claims by environmental activists and other strategic litigants in Australia and internationally, under both consumer protection and securities laws. For example:
- The Australian Centre for Corporate Responsibility brought proceedings in the Federal Court against Santos, alleging that its green advertising relating to the "clean" nature of gas as a fuel source was misleading under the Australian Consumer Law. It also alleged that statements in Santos' 2020 Annual Report that it had a "clear and credible plan" to achieve its target of net zero emissions by 2040, without disclosure of the material dependencies on which its ability to achieve that target turned, was misleading contrary to the Corporation Act and Australian Consumer Law;
- In the UK, BP was forced to withdraw its "Advancing Possibilities" green advertising campaign after public interest law firm ClientEarth alleged that it misleadingly overstated its sustainability credentials (given that, at the time, more than 96% of the company's CAPEX remained in fossil fuels rather than renewable energy).
And the cases are not confined to the oil and gas sector:
- The UK Advertising Standards Board recently ruled that packaging for Lipton Iced Tea that stated "Deliciously refreshing, 100% recycled" and poster advertising stating "I'm 100% recycled plastic" were misleading or deceptive as the cap and label were not made of recycled materials. This was despite the small print that stated "excludes cap and label". The ASA ruled "the overall impression was that all components of the bottle were made entirely from recycled materials", and the qualification "was insufficient to counter that impression".
The trend towards decarbonisation
The widespread trend toward decarbonisation in climate-related corporate strategy and investments, driven by factors such as investor and shareholder activism, is starting to severely constrain access to funds for companies that are out of step with the goals of the Paris Agreement.
Those caught greenwashing will not only lose their license to operate in the court of public opinion but also potentially destroy the value of the company for shareholders.
In simple terms, this means that companies need to take action now to reduce their emissions footprint from their use of energy. And this is happening.
For example, in Australia, 2020 was a record year for PPAs, with corporate carbon-neutral standards recognising and rewarding investment in bulk renewables. However, the question remains how much of this "renewable energy" was truly renewable and how much is greenwashing?
How much greenwashing is extremely hard to prove one way or the other because 'physical' electricity is fungible. One watt from a coal generator cannot be distinguished from one watt from a solar panel, and is seamlessly exchangeable.
The digitisation of electricity changes this and will enable the unique immutable identification of 'every electron' including its time, place and source of origin. Sunified is leading this digitisation with its patented Unity digitisation module which fingerprints power and embodies it in a blockchain.
Sunified's technology provides 'proof of origin' green power, which is evidence-driven, transparent, and embedded in systems that control power's global regulation and distribution. This enables corporations to deliver on their carbon reduction targets and to expect others to show proof of their green credentials up and down the supply chain.
And just as importantly, such technology-verified 'true green energy' allows consumers to test the accuracy of the green credentials of products or other claims (i.e. carbon neutrality). Again, this is a substantial leap forward from the opaqueness of today's greenwashing.
Recommendations for best business practices
ESG issues and, in particular, environmental disclosure and sustainability claims are increasingly a focus for corporate regulators globally and legal action by activist groups. Moreover, these actions are increasingly successful, thus causing reputational and financial damage to the businesses concerned.
The key takeaways and best business practices for company directors are to:
- Ensure environmental disclosures and product claims are aligned with a sustainability strategy.
- Be easily able to substantiate and justify claims, as understood in a reasonable manner as of the time they were made.
- Ensure organisational sustainability measures are appropriately resourced through clear action plans.
- Embed climate goals in enterprise risk and compliance frameworks.
- Strive for complete, straightforward language and detailed statements that the business can support in relation to specific elements of your company's operations, products, or services. Avoid absolute language and general claims that are not defensible across of the entirety your company's operations, products or services, suppliers and partners. Be specific, not selective.
In summary, businesses must be careful in deciding what claims they make about their products, considering their broader sustainability credentials. Firms should be prepared to back their claims and be confident in the claims being rigorously evaluated by regulatory agencies and by the wisdom of the crowd.
Being true green means being able to prove it.