Crashing the Greenwashing Wave

As climate change heats up and organizations look to promote their progress on the sustainability front, concerns are growing about whether carbon reduction claims are entirely valid. More than a few businesses -- including industry heavyweights such as Shell Oil, Volkswagen and H&M -- have wound up in the crosshairs of activists, who have accused them of greenwashing.

While identifying and substantiating greenwashing is at times murky -- it’s entirely clear that accusations of greenwashing can wreak havoc with customers, employees, shareholders, and activists. “There are a whole lot of things companies do that make people think they are greenwashing,” says Tom Lyon, Dow Professor of Sustainable Science, Technology and Commerce at the University of Michigan.

“Greenwashing is rife. It’s everywhere,” adds Felicity Spors, senior director for Sustainable Finance & Innovation at Gold Standard Foundation, a not-for profit that promotes a framework for measuring impacts.

In some cases, the greenwashing may be intentional. In other instances, it’s inadvertent. Regardless, companies increasingly focus on establishing a framework based on evidence and accountability. Some of this pressure derives from stricter regulations emerging in the US, EU and UK.

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In the Wash

Any foray into greenwashing requires an understanding of what it is -- and what it isn’t. Typically, the term refers to misleading, inflated or false claims about the positive impact of a program designed to reduce carbon output or improve an environmental impact.

Greenwashing claims typically center on carbon targets, environmental impacts, biodiversity loss and improving livelihoods, particularly in developing nations. The term doesn’t mean an organization isn’t trying to achieve better results -- it might even track data meticulously. Yet somewhere along the path to progress, a perceived mismatch between claims and outcomes occurs.

For example, an apparel company might introduce an inexpensive but “sustainable” line of clothing woven from environmentally friendly plant fibers. This sounds great but if the clothing doesn’t wear well or the company’s other products aren’t sustainably sourced, critics may say that the company is engaged in greenwashing.

Similarly, an energy company might claim that a new oil or mineral extraction technology reduces environmental impacts. However, if the system greatly expands volumes and outputs, the net effect may be a negative impact on the environment.

Greenwashing can involve something as straightforward as setting ambitious carbon reduction goals without any way to measure results accurately. Or it can involve technical data that points to a mismatch between reporting and actual impacts. “There are different shades of greenwashing,” observes Spors.

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Typically, “companies don’t lie about initiatives. They recognize that there are specific laws against outright fabrications,” Lyon explains. “Greenwashing charges usually revolve around more subtle factors, such as marketing and messaging.” Vague terms, claims that cannot be verified, cherry-picked data, and incomplete or selective disclosures, such as promoting climate change but making investments that indicate otherwise are all issues, he says.

Regardless of the reason, serious consequences can follow. Negative press is only the start. Dissatisfaction and anger can also lead to financial fallout, ranging from a drop in revenues to a sagging stock valuation. A 2020 study conducted by YouGov, for example, found that 50% of US consumers have boycotted a brand based on their dislike for a policy or approach, though the results weren’t limited to greenwashing.

The Numbers Game

Activists and investors increasingly rely on metrics to track ESG performance. One important tool is the Global Reporting Initiative (GRI). It provides universal, sector, and topic-specific standards for consistent data reporting methods. GRI says that its tools are now used by more than 10,000 organization in more than 100 countries to conduct inventory reporting and quantify impacts.

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Yet the GRI framework alone isn’t sufficient, Spors says. It essentially represents only one side of the coin. “It’s a disclosure standard that’s designed to measure impact, but it really depends on the impact. It looks at impacts through the single lens of materiality in context with finances and investments. But impacts can touch many other areas and involve many other things.”

Gold Standard is looking to fill the gap with an outcome-focused framework that takes other factors into consideration. For instance, this could include not only the fact that a company has replanted a forest but how long it takes for the forest to mature. It might also consider whether a company should be using water or other materials from a particular place rather than the fact that it isn’t polluting the water source.

“We have to change behavior to drive genuine contributions that lead to real-world change,” Spors explains. In other words, in too many cases, businesses are simply checking boxes and fulfilling reporting requirements rather than focusing on broader and more meaningful change. “This is a major contributor to gaps and discrepancies that can lead to greenwashing accusations,” she says.

Of course, obtaining accurate data can be vexing -- and that’s part of the fundamental problem. A farmer in Indonesia or a mineral supplier in Bolivia may not be equipped to deliver highly detailed data. Tools and technologies can help, including sustainability frameworks that plug into ERP applications, standalone carbon tracking tools, carbon certificates that authenticate claims, and ambient IoT networks that track data back to Scope 3 emissions. Yet, old fashioned paper reporting may also be required.

Still, none of these tools can ensure that an organization won’t find itself staring down the barrel of greenwashing charges. “Many of the net-zero and other claims that companies make are an attempt to look good but it’s clear that they don't have a truly solid plan in place,” Lyon says.

Evolving Beyond Green

Scrutiny over greenwashing isn’t likely to disappear anytime soon. In fact, it’s likely to intensify. “There is an entire generation of young people focused on companies standing up to their values and performing well in ESG programs. Many of these observers are quite sophisticated about what constitutes actual performance and what translates into greenwashing,” says JR VanOrder, a principal in the climate change and sustainability group at consulting firm EY.

In addition, government regulators are cracking down. In May 2023, The EU Parliament adopted stricter standards for what constitutes carbon offsets. In the UK, a key watchdog group that oversees advertising, the Advertising Standards Authority, has narrowed the definitions of what terms qualify as “carbon neutral” and “nature positive.” In the US, the Securities and Exchange Commission has proposed more stringent mandatory ESG disclosures for companies and also for mutual funds.

Enterprise leaders are likely to feel the heat further in the years ahead. For example, in June 2023, the International Sustainability Standards Board (ISSB) issued two voluntary sustainability disclosure standards designed to aid regulators as they attempt to crack down on greenwashing. Canada, Britain, Japan and several other countries are reportedly considering adopting the ISSB standards. Meanwhile, The European Union is finalizing a more extensive set of disclosure rules for both EU companies and non-EU companies that meet certain criteria.

A Path to Progress

Part of the solution, Lyon says, is to establish a more holistic model for ESG, and boost both the quantity and quality of data that’s used to create accurate reports. Yet, there’s also a need for greater alignment between goals and practices. Tools and resources from GRI and Gold Standard are highly useful, yet it’s critical to tune into broader and deeper issues that “create a framework for honesty and transparency,” he says.

Communication is critical Spoors points out. It’s wise to spend time with constituencies -- customers, employees, stakeholders, and NGOs -- and discuss ideas and expectations. This may mean meeting with critics who are willing to deliver constructive thinking and advice. “Focus groups, public meetings and community awareness committees can all help an organization raise awareness, and identify issues,” Lyon says. “It can help a company understand how things are playing out and it can ultimately lead to far better alignment.”

Yet, ultimately, Lyon says, avoiding greenwashing comes down to a central theme. “The key is to be honest and make a real commitment to achieving goals.”