Environmentally conscious: avoiding corporate greenwashing

February 2023  |  FEATURE | RISK MANAGEMENT

Financier Worldwide Magazine

February 2023 Issue

For companies, governments and the wider general public, sustainability concerns have perhaps never been more important. The rising profile of the environmental, social and governance (ESG) movement has impacted organisations in a variety of ways. Consumers too are prioritising companies committed to embracing, and acting on, environmental concerns. Between 2016 and 2021, online searches for ‘sustainable’ goods increased by 71 percent, according to a survey by the World Wide Fund For Nature.

Considering these changing expectations, for business owners, leaders and administrators, sustainable commercial practices are becoming imperative. And the response from businesses, by and large, has been positive. “On the whole, businesses have embraced sustainability and ESG across virtually all industries,” says Gabriel Berg, a partner at Robins Kaplan. “Pressured by a new generation of consumers, many businesses are finding that being a good corporate citizen has become much easier – and empirical evidence shows bottom lines have been rewarded for it.”

However, there is no ‘one size fits all’ approach to ESG and sustainability, and corporate attitudes to these issues differ, according to Katherine Tyler, a legal director at Kingsley Napley LLP. “For some, the impetus to start committing the additional spend to these areas has been the actual and anticipated increase in regulation and guidance, such as the CMA’s Green Claims Code which was announced in September 2021,” she says. “Of course, there are a number of other factors relevant to corporate decision making. These include the heightened awareness of the climate crisis and the risks of over-consumption, the rise of smartphone and shareholder activism, the growth in responsible investing, and more conscious consumer habits, which have all been spurred on by a very active community of non-governmental organisations (NGOs) and civil society.

“As you would expect, different companies have approached these issues very differently, with some seeing a real gain to be made by becoming market leaders in these areas. Conversely, for some companies the successful integration of ESG and sustainability considerations poses more of a challenge – especially where it appears to be irreconcilable with current business models,” she adds.

Rise of greenwashing

Perhaps one of the most dangerous side effects of the pivot toward ESG and sustainability is the emergence of greenwashing, whereby companies provide misleading information about their eco-friendly efforts. Despite the financial and reputational risks, greenwashing appears to be on the rise, with companies employing a variety of tactics to hoodwink stakeholders, customers and regulators. For example, some use vague and unclear terms such as ‘eco’ or ‘sustainable’ without adequate explanation or evidence, promote their own ‘eco’ logos and labels not associated with any recognised body or certification, and omit certain information to make products or services appear more environmentally friendly than they actually are.

With increased attention being placed on environmental concerns, there are likely many factors driving companies to engage in this perceived deception, which may in many cases be unintentional. For Paul Davies, a partner at Latham & Watkins, the growth in allegations of greenwashing has largely evolved from advertising standards and similar consumer concerns around promotion of companies and products. “This has meant that greenwashing has been a particularly relevant concern for companies in certain industries that have caught the attention of activists, particularly companies in fossil fuel-related industries, and companies that have chosen to elevate and market their ESG credentials.

“However, as public concern over climate and other ESG issues has intensified, and companies and their stakeholders are increasingly realising the marketing benefits of identifying their ESG credentials, the issue has rapidly become one of relevance to a far greater number of organisations, particularly those in consumer-facing sectors,” he says. “Many companies that are accused of greenwashing will likely not have any intent to do so. Instead, they may have not have sufficiently robust governance and processes for collection, verification and review in place to ensure that information that was made publicly available was accurate, leading to a situation where what was intended to be a genuine attempt to articulate the benefits of their company or its product faces accusations of being misleading.”

As Ms Tyler points out, the market has adapted to this shift in consumer and investor focus, and there is now a tangible commercial gain to be made by those appearing to be ‘sustainable’ or taking ESG issues seriously. “Investors are becoming increasingly wary of companies with poor ESG scores,” she notes. “This has meant that companies may try to profit from making what are ultimately misleading or ambiguous claims about their social or environmental credentials. The recent raft of greenwashing cases, both in the UK and abroad, expose how some companies are using environmental claims ostensibly to drive sales, and without always being able to sufficiently back up those claims.”

Growing awareness and potential repercussions

Historically, sustainability concerns were considered the province of a niche set of consumers, notes Ms Tyler. But as awareness of the impact of the climate crisis has grown, sustainability and corporate attitudes to ESG issues have become more relevant to a broader set of consumers and investors.

Alongside the increased interest in ESG and sustainability, consumers are becoming more sceptical of many of the claims made by companies. A recent YouGov poll found that two thirds of people are now wary of environmental and social claims made by brands.

Investors, too, have concerns. A report from Schroders found that around 60 percent of institutional investors believe greenwashing is blocking them from delivering on their sustainable investment goals. Meanwhile, in a survey of more than 4600 individual investors across the US, UK, France and Germany commissioned by Workiva, a majority said they find it hard to trust business’ claims at face value.

Given the burgeoning interest in sustainability, it is easy to see why companies might wish to engage in greenwashing. But the financial and reputational risks of doing so can be extreme. As Ms Tyler points out, the scale of the damage obviously depends on the seriousness of the allegation and how the greenwashing is characterised.

If companies are found to be greenwashing, not only could they be actively harming the environment – if exposed, the consequences could be detrimental to the business’ reputation. “Right now, the biggest risk to businesses being exposed for greenwashing is a public relations problem that can lead to reduced profits, especially in the age of social media,” warns Mr Berg.

Equally, there may be significant financial repercussions if companies are found to have misled the public and regulators. The now infamous Volkswagen emissions scandal, perhaps the most prominent example of a company being trapped in a greenwashing lie, saw the German car manufacturer caught hiding excessive levels of toxic diesel emissions in 2015. ‘Dieselgate’ is believed to have cost the company nearly $35bn in fines and settlements and saw a management rout and thousands of regulatory probes and lawsuits.

In such cases, companies may be subject to enforcement action. “Is it a matter for the advertising regulator, or can it be characterised as criminal conduct tantamount to fraud or market manipulation?” asks Ms Tyler. “Historically there has been relatively little enforcement action taken against companies considered to be greenwashing, however, the past few years have seen a real shift in this regard.

“In the US, the Securities and Exchange Commissions’ Climate and ESG Task Force has been particularly active,” she continues. “In the UK, the Financial Conduct Authority is yet to take any enforcement action for ESG-related issues, although a number of recent developments, such as the announcement of a new ESG advisory committee and consultation on a proposed new anti-greenwashing rule, indicate that it is likely that enforcement action in relation to ESG matters will be a growth area.”

As Mr Berg points out, the repercussions for greenwashing are evolving. “A cottage industry of greenwashing lawsuits has been spawned,” he says. “Greenwashing cases, however, are in their infancy, and proving these claims is extremely difficult. Plaintiffs tend to rely on general studies or media reports – fodder for withering cross-examination. Still, the greenwashing lawsuits will continue and the claims likely will become more sophisticated.”

Avoiding the pitfalls of greenwashing

Risk mitigation strategies are needed to counter greenwashing. With various stakeholders becoming more invested in ESG and sustainability concerns, and with corporate agendas increasingly interested in promoting legitimate sustainability programmes, the role of leadership is ever more important if companies want to avoid the consequences of greenwashing.

“Corporate leaders should be advised only to make responsible claims about their environmental business practices that are specific – and supportable by scientifically reliable data,” suggests Mr Berg. “Armed with industry-specific methods to track and measure ESG quantitative data, even now, many businesses voluntarily publicise the data on their websites. The data systematically should be updated to remain current.”

For Mr Davies, companies should treat ESG disclosures the same way they treat financial disclosures. “Over many years, companies have developed robust and diligent processes to ensure that financial data that they disclose publicly is accurate. Such processes are both internal and external in nature, and provide the company with confidence that the information they are reporting is accurate.

“Similar governance processes should be considered for ESG. In addition, depending on the jurisdiction of the company, a number of advertising standards agencies and public regulators have begun in recent years to develop guidance on greenwashing, and how companies may avoid it,” he adds.

A culture of compliance will go a long way to avoiding greenwashing missteps. “It can be helpful to see the increased focus on greenwashing and auditable environmental claims as an effort to introduce human rights and environmental due diligence obligations by an alternative route,” says Ms Tyler. “Seeing it this way focuses minds on what steps are necessary to allow an organisation to make the claims it might want to make and to identify weak areas that it might need to improve in line with its stated purpose or objectives. In seeking to reduce the risks of greenwashing, embedding a culture of compliance and transparency is a critical first step.”

In Mr Berg’s view, though too often politicised, industries such as oil & gas, media, farming, airlines, cosmetics, apparel, and investment firms all are embracing ESG – a trend likely to continue. “Proving the scientific veracity of a public assertion before anyone can credibly accuse a business of greenwashing can increase market share and blunt any greenwashing accusation,” he says. “Rewards for ESG initiatives are too important to be jeopardised by making hyperbolic or unsupportable public statements. Staying one step ahead of any greenwashing accusation is the absolute best practice.”

Promoting and reporting ESG

Responding to climate change and meeting ESG obligations will be a marathon, not a sprint. Consumer demand for products and brands that lead on ESG performance will persist for the long term. As such, companies will continue to benefit from promoting their ESG credentials.

“This will not just be applicable to consumer-facing companies themselves but, as the global regulatory landscape evolves and an increasing amount of legislation is introduced requiring companies to take a certain degree of responsibility over their supply chains, also to business-to-business companies,” says Mr Davies.

Looking ahead, the regulatory imperative to avoid greenwashing by strengthening internal policies and processes is sure to intensify under ESG reporting obligations. Today, more than 90 percent of S&P 500 companies publish ESG reports in some form, as do approximately 70 percent of Russell 1000 companies, according to the G&A Institute. Furthermore, reporting ESG elements is either mandatory or under active consideration across a number of major jurisdictions.

“Emerging regulation in a number of jurisdictions will mandate ESG disclosure from many companies that do not currently report ESG information publicly, including in relation to the mandatory publication of transition plans which demonstrate how a company’s strategy is net-zero aligned,” says Mr Davies. “To the extent such transition plans, or the targets required to be included in such transition plans, are considered not sufficiently supported by actions, this may lead to further allegations of greenwashing.”

Greenwashing scandals will continue to attract headlines, with regulators scrutinising the environmental claims made by prominent companies and brands. In response, companies will need to consider recruiting professionals with expertise in ESG issues, ensuring they can evaluate their own performance and communicate it accurately to an informed and mistrustful market.

© Financier Worldwide

BY

Richard Summerfield