ESG Greenwashing: A not-so green business practice

ESG Greenwashing: A not-so green business practice

Greenwashing  refers to the practice of falsely promoting an organization as environmentally friendly when in practice the organisation may be causing more harm to the environment through its activities and business operations. This is essentially disseminating false or unscrupulous information regarding an organization’s environmental strategies, goals, motivations, and actions.

In 1986, prominent environmentalist Jay Westerveld coined the word ‘greenwashing’ when he observed vast amounts of waste that hotels produced and failed to undertake any sustainable measures to tackle it. However, the same hotels promoted the reuse of towels as part of their environmental strategy; which implied that reuse of towels was nothing but a cost saving measure.

In the report, “Drivers of Green Washing” Magali A Delmas and Vanessa Cuerel Burbano proposed that greenwashing has skyrocketed in recent years. In 2015, Volkswagen ran a marketing campaign claiming low emissions and eco-friendly features while on contrarily installing “defeat devices” software in their cars that were designed to cheat emissions. The engines installed with this software in reality emitted nitrogen oxide pollutants up to 40 times above what is allowed as US norms. The scandal resulted in VW recalling millions of cars worldwide and running in losses worth billions.

Another example of greenwashing fast fashion brands such as H&M are practicing unethical practices in their manufacturing process, supply chain, sweatshop conditions, labour exploitation and how these clothes are responsible for filling up landfills. Norway’s Forbrukertilsynet (Consumer Authority) ruled last year that fast fashion brand H&M was under investigation for its supposedly ethical ‘Conscious’ collection. H&M is unable to provide any clear explanation or prove how the clothes in the “conscious collection” are more sustainable than other products they sell. Organisations exploit the vagueness and ambiguity of terminology of what constitutes green to their advantage only to increase sales and appear environmentally conscious.

ESG Investing and Greenwashing

The concerns for sustainable investing are growing amongst investors and efforts to measure and disclose ESG-related data and its impact on business, has gained momentum in recent years. Global ESG-linked funds took in nearly US $350 billion  last year, compared with US $165 billion in 2019, according to data from Morningstar. Net assets held in UK-domiciled ESG funds went from US $39 billion at the beginning of 2017 to US $96 billion by the end of 2020, including active and passive funds. Given the unprecedented interest in responsible investment by asset owners, one concern is that some fund managers may deceptively endorse the UN PRI to attract flows from investors while not incorporating ESG into their investment decisions, leading to greenwashing.

There is a growing and heightened effort on monitoring, measuring and reporting of ESG parameters; however, progress on disclosures remain uneven. The uncoordinated evolution of voluntary frameworks has led to varying degrees of quality on data and disclosures, across industries and geographies. Multiple frameworks eventually result in confusion and therefore the risk of green washing. Corporates are already witnessing financial losses as they fail to attract investors in the absence of strong reporting standards and uniformity of ESG related disclosures

Mitigating ESG

ESG integration in investment strategies is the most effective mechanism to ensure that greenwashing challenges are overcome. The point of integration is to use ESG factors to pursue better risk-adjusted returns not only for the investor but also for the investee. 

  • Role of Regulators: Regulators have largest responsibility from a ESG risk assessment standardisation perspective, to create a level playing field for organisations. What we therefore need is a comprehensive transparent policy guideline, which include a definition or taxonomy on green or sustainable finance, bringing clarity on what qualifies, enable asset tagging, resulting in taking targets to bring in a larger mix of green finance in portfolios. Variation in regulation across countries and inappropriate jurisdiction of cross-country practices contribute to a particularly uncertain regulatory environment for multinational corporations. More stringent, enforced regulation of greenwashing would serve as the most direct means to reduce it
  • Strong Third-Party Assurance and Supervision: Inclusion of ESG risk assessment under third-party risk-based supervision, will enable financial institutions and banks to assess ESG and climate-related financial risks, thus maintaining asset quality, futureproof planning for the long-term for future credit portfolio, loan pricing and more, all of which guarantees risk mitigation and evolution with a risk-adjusted return. This would also help towards market standardisation and a level playing field for market participants
  • Public Knowledge and Literacy: Its critical for consumers and stakeholders to show vigilance and determine the very legitimacy of sustainability. Consumers and investor’s confidence can be negatively affected due to greenwashing. Pressures from both non-market actors (regulators and NGOs) and market actors (consumers, investors, and competitors) are key drivers of greenwashing. Regulators and NGOs can hence, take actions to improve the availability of information and decrease uncertainty about punishment for engaging in greenwashing

Greenwashing can have profound negative effects on consumer and investor confidence in green products and environmentally responsible firms, making these stakeholders reluctant to reward firms for environmentally sustainable performance. As we continue to face climate change risk to businesses; regulations will have to become more stringent and environmental considerations will pervade the marketplace.

One of the  biggest challenge with greenwashing is that proceeds may get diverted sometimes without the knowledge of investors to unsustainable activities and if unchecked could result in loss of financial and environmental damages. Therefore, it is of utmost importance for greenwashing to be curbed, given that rampant, unchecked greenwashing could erode the consumer market for green practices and services in the future, and it could also dissuade the larger investor community for socially responsible investing.

Bibliography:

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https://www.researchgate.net/publication/331630061_GREENWASHING_A_Study_on_the_Effects_of_Greenwashing_on_Consumer_Perception_and_Trust_Build-Up

https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/14016/cmr5401_04_printversion_delmasburbano.pdf

https://hbr.org/1994/07/the-challenge-of-going-green

https://link.springer.com/referenceworkentry/10.1007%2F978-3-642-28036-8_104