ESG

Greenwashing: What Is It and Why Should It Be on Your Board’s Agenda?

The birth of the global environmental movement in the 1960s was swiftly followed by the emergence of a new and far less welcome activity: greenwashing.

As consumer interest in the environmental impact of products and services began to influence purchasing decisions, businesses recognised that the “green pound” was worth pursuing. The result was a rush to associate products and brands with environmental responsibility. Eco-friendly claims in advertising campaigns and verdant colour palettes on packaging were adopted to imply sustainable credentials that frequently failed to stand up to scrutiny. The age of greenwashing dawned.

A backlash against greenwashing was inevitable. High profile companies were exposed for making false or disingenuous ecological claims or championing “sustainable” environmental initiatives that were anything but.

However, as the environmental movement has matured, and the climate emergency has become more urgent, corporate Environmental, Social and Governance (ESG) performance has become much more than a marketing campaign. It is now a key performance indicator used by investors, consumers, and employees to assess a company’s reputation as a global citizen.

The cynical greenwashing of products, operations and supply chains has no place here, yet it persists. Less overt, more sophisticated and more difficult to detect, greenwashing has evolved.

Boards must be alert to the significant reputational and commercial damage that greenwashing accusations could have on the businesses they serve.

 

What Is Greenwashing?

Greenwashing is when a company uses marketing campaigns and corporate communications to create the impression that it is more environmentally responsible than it really is. Greenwashing can be associated with specific product lines and brands or an entire business.

Examples of greenwashing are exposed when independent analysis of environmental claims shows that they do not match reality, that they do not achieve the advertised environmental benefit, or that they are a deliberate attempt to mask damaging environmental activity in other parts of the business.

 

The History of Greenwashing

Whilst its roots paralleled the emergence of the environmental movement in the 1960s, the term “greenwashing” wasn’t coined until 1986. Its recognition as a concept did little to prevent continued attempts by a wide range of organisations to piggyback on or leverage green issues for profit or to divert focus from less ecologically acceptable activities.

 

Why Should Greenwashing Be on the Board’s Agenda?

As awareness of the climate emergency grows thanks to high profile activists such as Greta Thunberg and Sir David Attenborough, the stakes have risen. Focus is squarely on conspicuous corporate consumption and the responsibilities of businesses as global citizens.

Today, a reputation for doing the right thing by the planet is worth more than a righteous glow; it is the route to sales growth driven by consumers who are more likely than ever to change their purchasing habits based on environmental impact.

The buying power of Generation Z is increasing, and this demographic has a strong sense of personal values, with sustainability high on the list. These values are driving purchasing choices across everything from fashion to food, insurance to energy. 73% are willing to pay more for a sustainably produced product, according to a survey by First Insight, with most happy to add up to 10% to the purchase price.

Consumers are seeking out brands that align with their personal values and the traditional lure of brand longevity is losing its power; a start-up with a sustainable stance can be more attractive than a heritage brand.

At the same time, consumers are also prepared to boycott brands if they are found to be acting unethically. Research by Kantar among UK consumers in 2019 found that 77% of 1200 respondents had “switched, avoided, or boycotted buying certain products based on a brand’s sustainability or environmental policies, or might consider doing so.”

Accusations of greenwashing, therefore, represent a considerable reputational and commercial risk to the organisation. It ensures the organisation’s transparency and integrity when communicating its environmental performance is a matter of governance. Any divergence between a company’s marketing messages and reality represents a governance failure.

In addition to threats to corporate reputation and revenues is the rising interest of investors in the long-term sustainability performance of target organisations. ESG investing is a growing trend, making it the duty of the board to oversee and publish complete and accurate information about environmental performance and impact to inform potential investors. In fact, activist hedge fund investors are warning that they will punish board directors at companies that do not fully disclose quantitative information such as carbon emissions. Funds such as BNP Paribas and TCI have voted against the re-election of directors and the approval of financial statements at companies that fail to provide details of their carbon footprint.

 

What Are the Risks of Greenwashing?

The risks of greenwashing range from reputational damage and loss of customer trust, to legal challenges and loss of investment. But ultimately, of course, the biggest risk is the direct environmental impact of falsely marketing products as environmentally conscious and continuing to operate unsustainably.

If greenwashing continues to be endemic, the planet will be less able to sustain the people that live on it and businesses that sell to them.

 

How To Spot Greenwashing in Your Organisation

It is natural for businesses to want to present activities in the best possible light, but messages about sustainability and environmental performance must always be evidence-based and accurate. Vague statements and unsubstantiated claims are a red flag when analysing marketing campaigns and corporate reports.

Additionally, environmental activists Greenpeace recommend four tests for identifying greenwashing. These are aimed at helping consumers spot the signs of greenwashing, but directors can apply them critically to their own organisation to see where it may be crossing the greenwashing line. The four tests are:

Core Business: Is the organisation’s core business an area that is inherently environmentally damaging? Examples include fossil fuel-based energy companies, car manufacturers, and mining companies. Many of these organisations may be working to reduce the impact of their activities, such as developing alternative energy and electric vehicles, which should be encouraged. But if the company does not acknowledge the fundamentally negative impact of the core business, this amounts to greenwashing.

Advertising Practice: Related to the above, when businesses use significant advertising budgets to promote the overtly “green” side of their business, whilst continuing to run the rest of their organisation on unsustainable policies.

Greenwashing in marketing and advertising can be more subtle, such as the choice of green hues in packaging, the use of nature imagery and words such as “natural”, “pure”, or “free from”. If these design choices are not supported by robust evidence that the product or service in question offers a definitive environmental benefit, greenwashing must be suspected.

Research and Development: To what extent do the business’s research and development activities seek to develop workable alternatives to unsustainable processes, rather than merely trying to “clean up” after them?

Environmental Lobbying Record: Is the organisation involved in lobbying against controls on polluting activities? If, on the one hand, it is presenting an eco-friendly image, whilst behind the scenes, it is attempting to slow progress towards environmental regulation, the business is guilty of greenwashing.

 

 

How To Avoid Greenwashing

Companies can avoid greenwashing by:

  • Identifying the full environmental impact of the business
  • Making clear public commitments to environmental improvement
  • Tracking progress against those commitments using suitable ESG management tools
  • Reporting regularly with full transparency
  • Ensuring that all public-facing messages – from marketing and advertising to corporate reporting – present an accurate and balanced picture of the business

Organisations must be realistic and open about the impact their existence has on the environment throughout the product or service lifecycle. Only by being fully open about environmental impact can a business create a benchmark from which to improve.

Corporate environmental commitments should ideally align to the UN Sustainable Development Goals (SDGs), which were set in 2015 and aim to achieve a sustainable future for all by 2030. The business should set targets for progress and regularly report against them.

Accuracy and transparency are watchwords. The business must avoid vague statements and making claims that cannot be evidenced. Where improvement is needed, this should be acknowledged. The board should set the tone for transparency and a culture of continuous improvement.

The adoption of ESG principles must be accompanied by a governance framework to support and track achievement. Using ESG management tools helps to quantify progress towards compliance with standards and regulations.

 

In Conclusion

Greenwashing is a disingenuous and damaging practice that fractures customer trust, threatens investment, and ultimately limits an organisation’s progress towards both environmental and commercial sustainability. In a socio-economic climate where corporate environmental performance is under the microscope, rejecting greenwashing in favour of open, transparent commitments to improving environmental performance is critical and should be addressed and governed at the board level.

Learn more about what your board can do to tackle environmental, social and governance issues with ESG Solutions.

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