Why greenwashing is a huge risk

August 2024 | SPOTLIGHT | RISK MANAGEMENT

Financier Worldwide Magazine

August 2024 Issue

Greenwashing is increasingly having its day in court, and boards must prioritise ending it, to shield companies from the legal fallout.

Two recent high-profile cases highlight the growing legal scrutiny and action on misleading environmental claims. In the Netherlands, an airline was found guilty by a court for deceptive advertising related to what it called “sustainable aviation fuel”. Similarly, a Danish court ruled against one of Europe’s largest pork producers for its misleading “climate-controlled pork” campaign.

In the past two years, a wave of regulations has emerged to combat misleading environmental claims, commonly known as greenwashing. These laws have shifted the practice from ethically dubious marketing to a growing corporate threat which boards cannot afford to ignore. To stay ahead of the curve, boards, management and all customer-facing personnel need to be well-informed about these new and upcoming laws.

Greenwashing is surprisingly widespread. In 2021, the European Commission found that more than 40 percent of green claims made on business websites were “exaggerated, false or deceptive”. Offending companies use the colour green or words and phrases such as “eco-friendly” and “good for your pocket and good for the planet” to suggest that products have sustainable credentials when they do not. But the public and policymakers have caught on and are setting the law in opposition to greenwashing.

The EU Green Claims Directive marks a major step forward in combatting greenwashing. The Directive empowers consumers to hold companies accountable for misleading environmental claims in their marketing and communications. It also enforces these standards with significant consequences for non-compliance. Companies found guilty of greenwashing can face fines of up to 4 percent of their annual revenues, be prohibited from public procurement processes, and be forced to either withdraw or rectify misleading claims or to publish corrective advertising. The Directive applies to any organisation targeting EU consumers, regardless of their location.

A wave of similar regulations and guidelines is emerging around the world. In the UK, the Financial Conduct Authority’s anti-greenwashing rule, implemented in May 2024, requires firms to ensure their sustainability claims are accurate, clear and fair. In the US, the Federal Trade Commission is updating its Green Guides to provide clearer definitions and guidance for consumers on commonly misused environmental terms, including ‘organic’, ‘sustainable’ and ‘compostable’, among others. And in India, the Central Consumer Protection Authority is finalising Guidelines for the Prevention and Regulation of Greenwashing. These aim to crack down on unsubstantiated environmental claims and misleading climate impact information in advertising.

Nevertheless, companies continue to engage in greenwashing for a wide range of reasons. In a poll of C-suite executives we conducted last year, 35 percent of respondents said that greenwashing stems from a belief that sustainability enhances sales. The second most-cited reason was corporate ignorance about sustainability. Indeed, in some cases, companies make misleading claims without fully understanding their products or services’ environmental impact or failing to understand greenwashing’s reputational risks.

Amid this changing landscape, company leadership must embrace genuine environmental commitments. This highlights the board’s responsibility to set the right tone and ensure their companies operate with transparency and integrity. The board, through its oversight role, should ensure management establishes a clear process for handling external communications related to environmental claims, both explicit and implicit. Below are four steps companies can follow to make sure their environmental claims are accurate and verifiable, and avoid misleading in any manner.

Identify applicable standards. Businesses should identify the relevant environmental laws and standards and the methodologies they will use to substantiate their claims. The EU Green Claims Directive permits businesses to use scientifically recognised methods. While the Directive does not provide an exhaustive list, it offers a valuable starting point for companies to ensure their claims align with these established methodologies.

Gather supporting evidence. With environmental claims clearly defined and methodologies established, businesses must build a strong foundation of supporting evidence. This can include scientific research, lifecycle assessments, relevant certifications and any other verifiable data that backs up their claims. Rigorous data analysis and a transparent link between claims and supporting evidence are essential. This approach not only ensures credibility but also prepares businesses for potential audits or other verification processes.

Develop clear communications. Once the claim is scientifically assessed with supportive evidence, businesses should disseminate it correctly. Companies should develop clear and transparent communication strategies for this, presenting clear, unambiguous and truthful claims in a way that consumers can easily understand.

Monitor and review claims. Businesses should establish procedures for monitoring and reviewing their environmental claims. This process ensures accuracy and relevance. Periodic review of claims, supporting evidence and rationale is essential.

At its core, greenwashing is an ethical issue that calls for collective responsibility. Companies need to be mindful about disclosures. When they make a claim, it should be based on real, significant impact, and they must communicate this in a transparent manner. But executives should remember that transparency is just one piece of the puzzle. Companies should avoid ‘greenhushing’, the act of concealing or downplaying their sustainability efforts to circumvent scrutiny or criticism.

Getting sustainability communications right requires the perfect balance between credibility and visibility. Ensuring that these efforts are not mere marketing tactics but genuine, credible efforts toward a sustainable future is challenging. In a crowded marketplace, visibility through communication is also vital to differentiate and attract customers. Companies that master the art of communicating sustainability authentically will build enduring trust with consumers and reap long-term rewards.

Manali Paranjpe is programme director, Evi Angelidou is director of member development and Anuj Saush is center leader of the ESG Center, Europe at The Conference Board. Ms Paranjpe can be contacted on +32 (2) 675 5405 or by email: mparanjpe@tcb.org. Ms Angelidou can be contacted on +32 (2) 675 5405 or by email: pangelidou@tcb.org. Mr Saush can be contacted on +32 (2) 675 5405 or by email: asaush@tcb.org.

Manali Paranjpe, Evi Angelidou and Anuj Saush

The Conference Board