Introduction
There is no doubt that the incidence of greenwashing has been on an upward trajectory in recent times. As the world tries to tackle climate change, with ever-growing and more widespread awareness, it seems that cases have become more sophisticated and intricate, posing a significant challenge to regulators and other stakeholders that require transparency. This article explores the current scenario, and the path regulators are taking. Let’s examine the situation.
Setting a definition
Before going deep into the analysis, we must convey what greenwashing is, and whether the concept includes social issues or not. According to the Oxford Dictionary, greenwashing refers to "activities by a company or an organization that are intended to make people think they are concerned about the environment, even if its real business actually harms the environment." While the meaning of "greenwashing" can vary depending on who you ask, in this case, we are going to follow this definition, which was added to the dictionary in 1999 and was first used in 1987.
I must say that currently, cases of greenwashing are more common in the environmental realm than in the social one, due to the pressure that organizations face to implement decarbonization strategies to tackle climate change and align with the Paris Agreement. Broadly speaking, greenwashing is also a social issue because all environmental issues will, sooner or later, impact people.
A more modern and applied idea of greenwashing is the one coined by Laurence Tubiana, CEO of the European Climate Foundation, as "the new climate change denial" (1), emphasizing the harm this practice can inflict on the planet, people, and the global economy by misallocating funds. It can also undermine the efforts of reliable organizations, creating an uneven playing field where sometimes the best greenwasher is the one that receives the applause (and the money).
Greenwashing cases: the tip of the iceberg
One of the most emblematic cases of greenwashing in the last 10 years is Volkswagen’s so-called "diesel scandal" that was unveiled in September 2015, when the US Environmental Protection Agency accused the company of duping diesel emissions tests using "defeat devices". Volkswagen admitted installing software designed to reduce emissions during lab tests in 11 million diesel engines worldwide. This was the start of the case and estimations of the total cost for the company, including fines, compensation, civil settlements and buyback schemes, exceeded 30bn euros.
Unfortunately, what we see in the media is just the tip of the iceberg. While the most renowned greenwashing cases involve public companies and affect direct consumers or involve large sums of money, the truth is that greenwashing has other avenues that are less evident and more sophisticated. In January 2023, Planet Tracker published a report called The Greenwashing Hydra (2), explaining the different greenwashing categories. You’ll be surprised by the many ways an organization can hide greenwashing practices; or being more naïve, there could even be some that didn’t realize they were engaging in greenwashing.
Although all sectors have at least a couple of greenwashing examples, the financial sector is one that has been under scrutiny due to its crucial role in the decarbonization of the planet. A direct result of the pressure over this sector is the increase in greenwashing cases; according to a study (3), the number of climate-related greenwashing risk incidents has risen by 70% during the last year (September 2023). When considering investments, it’s important to note that the assets allocated to ESG ETFs have increased progressively since 2012, with a significant boost in 2020 to 203 billion USD, and further growth through 2023, reaching 480 billion USD, according to Statista. A study conducted in 2021 revealed that greenwashing was the primary barrier to sustainable investing, as mentioned by institutional investors (4).
Greenwashing is on the rise
For most people and companies, greenwashing is what's covered in the news and even though these are just the most high-profile cases, it's noticeable that greenwashing events are increasing. For other stakeholders, greenwashing is a widespread problem that goes undetected, even by regulators, investors, or consumers who are aware of the issue and understand that simply stating an organization is environmentally friendly or committed to net zero is not enough. In addition, green or eco-labels on products and services sometimes do not have a sufficient basis to be named that way, or show a partial truth that confuses consumers. According to the European Bank Authority (5), total alleged incidents of misleading communication on ESG related topics went up more than 5 times between 2012 and 2022, and the upward trend in the last 5 years has accelerated.
Greenwashing is complex, beginning with the fact that its definition is not widely agreed upon. Regardless, the changes that organizations must implement to achieve their goals - such as reducing GHG emissions, halting biodiversity loss, preventing pollution, increasing the use of renewable energy and reducing water use, to name just a few hot topics - pose a significant challenge. Some organizations may feel the pressure to showcase their sustainability merits or launch new sustainable products and services, regardless of whether it's a partial truth or merely a marketing strategy. The reality is that companies engaging in greenwashing or social washing are more common than we'd like to admit, and the problem can be approached in various ways and is full of subtleties.
Regulators are trying to face this growing issue that evolves as fast as rising world temperatures. ESG disclosure regulations are a good start for transparency, but not sufficient to tackle greenwashing. That’s the reason why there are new specific greenwashing regulations like the ones in the EU and UK.
Regulations move forward to catch up with greenwashing cases
In sum, the pressure to be green is everywhere, with location and sector agnosticism. The issue lies in distinguishing companies with solid claims from those that should be penalized. It’s not that the market lacks rules against greenwashing, but these rules need to be more specific. They should provide clarity to all stakeholders and implement stricter penalties. The SEC (Securities and Exchange Commission) and ASIC (Australian Securities and Investments Commission) have incorporated some rules to tackle greenwashing and have been very efficient in detecting violations and greenwashers. Some of the best known cases that the SEC has uncovered include BNY Mellon, Goldman Sachs and DWS. On the other hand, ASIC has done 35 interventions between July 2022 and March 2023 in Australia, with Vanguard Investments and Melbourne Securities among its latest cases this year.
Regulators are attempting to keep pace with new forms of greenwashing by introducing specific regulations to combat it. It’s worth mentioning that the EU Anti-Greenwashing Law was already approved in January this year, where EU countries have 2 years to implement this regulation into national laws. The purpose of this legislation is to guarantee the authenticity and reliability of environmental labels and claims made about a product or the trader, thereby enabling consumers to make more informed purchasing decisions.
In addition, for the financial sector, the UK Anti-Greenwashing Rule proposed by the Financial Conduct Authority (FCA) is expected to come into force on 31 May this year for all FCA-authorized firms that make sustainability-related claims about their products and services. Recently, in mid-May, the European Securities and Markets Authority (ESMA) announced new regulations for funds that utilize ESG or sustainability labels. These regulations include specific thresholds that must be met by sustainable investment funds.
The scenario is becoming more stringent, aiming to provide greater transparency for investors who are looking to support environmentally and socially responsible companies. This is also important for consumers who rely on product labels. In the same trend, companies need to invest in compliance and involve legal teams before disclosing any information related to climate commitments, net-zero targets, and other sustainability claims. A comprehensive understanding of ESG and sustainability is required within the organization, involving not only high-level executives but all employees as well. This ensures that the organization as a whole moves towards a clear ESG strategy and shared goals. It also helps avoid the risks of greenwashing, which, due to emerging regulations, could have a financial impact on the company.
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