What exactly is greenwashing and why is it a problem?
There is a growing demand for sustainable products and the expectation from consumers and shareholders that organisations go ‘green’ in their operations and investments. In response to this increasing demand, organisations have developed green marketing strategies to demonstrate their environmental responsibility and maintain corporate legitimacy. While not a problem in itself, where the message provided is not consistent with an organisation’s actual environment performance, the execution of these strategies may lead to accusations of greenwashing. The term greenwashing was first used in the 1980s in the U.S., where there was a strong call for environmental activism. Greenwashing describes the presentation of products, services, policies, or activities which is intentionally misleading regarding environmental practices and sustainability. Organisations that adopt greenwashing often selectively disclose positive information in relation to their environmental performance, and sometimes make misleading claims that are ambiguous and difficult to verify. The two most common forms of greenwashing are 1) talking up an organisation’s ‘green’ image without any significant change to its underlying operational or investment choices; and 2) marketing an organisation’s products and services as delivering positive environmental impacts without regard to the full lifecycle impact of those products or services. This second form of greenwashing also serves to divert attention away from the organisation’s environmental responsibility by positioning the consumer and their decisions as the key contributor to environmental outcomes. Organisations that employ greenwashing not only damage the environment, on which they depend for their continued operations, they also erode consumers' trust in sustainable products and services. Greenwashing behaviour increases scepticism from consumers who may already have trouble identifying true ‘green’ claims and overuse of terminology related to sustainability may lead to public confusion, and ultimately to the consumer choosing to ignore any such claims altogether.
Carbon offsets and greenwashing
Carbon offsets are commonly used by organisations to deliver their net-zero greenhouse gas (GHG) emissions targets. Carbon credits are purchased to offset any GHG emissions the organisation deems too expensive or too disruptive to eliminate, or in some industries such as the aviation sector, to offset GHG emissions that are difficult to eliminate due to technological limitations. However, using carbon credits to offset emissions only provides a cosmetic change to an organisation’s operations. An organisation which claims to be ‘sustainable’ or to be ‘carbon neutral’ without delivering a substantial reduction in their operational emissions may be guilty of greenwashing. Carbon offsetting should only be used as a strategy for compensating for GHG emissions which are hard to abate, not as an accounting mechanism that allows an organisation to continue its operations unchanged. There is a natural limit to the GHG emissions that can be offset using carbon credits, since there is limited land area to plant new trees and technological carbon sequestration and storage solutions are not yet available at scale. Furthermore, each carbon credit needs to be underpinned by a quantification of the carbon sequestration function it provides, and over what time period. It is therefore important that organisations tread carefully when relying only on carbon offsets to deliver their emissions reduction targets.
How to identity greenwashing?
In 2007, TerraChoice conducted a research project on products that carry environmental claims. This research was summarised in their “Seven Sins of Greenwashing”, published to help consumers and organisations understand and spot greenwashing, an extract from which is included below:
- Sin of the hidden trade-off: A claim suggesting that a product is green based on a narrow set of attributes without attention to other important environmental issues. Paper, for example, is not necessarily environmentally preferable because it comes from a sustainably harvested forest. Other important environmental issues in the paper-making process, such as greenhouse gas emissions or chlorine use in bleaching, may be equally important.
- Sin of no proof: An environmental claim not substantiated by easily accessible supporting information or by a reliable third-party certification. Common examples are facial tissues or toilet tissue products that claim various percentages of post-consumer recycled content without providing evidence.
- Sin of vagueness: A claim that is so poorly defined or broad that its real meaning is likely to be misunderstood by the consumer. All-natural is an example. Arsenic, uranium, mercury, and formaldehyde are all naturally occurring, and poisonous. All natural isn’t necessarily green.
- Sin of worshiping false labels: A product that, through either words or images, gives the impression of third-party endorsement where no such endorsement exists; fake labels, in other words.
- Sin of irrelevance: An environmental claim that may be truthful but is unimportant or unhelpful for consumers seeking environmentally preferable products. CFC-free is a common example, since it is a frequent claim despite the fact that CFCs (chlorofluorocarbons) are banned under the Montreal Protocol.
- Sin of lesser of two evils: A claim that may be true within the product category but that risks distracting the consumer from the greater environmental impacts of the category as a whole. Organic cigarettes or fuel-efficient sport-utility vehicles could be examples of this sin.
- Sin of fibbing: Environmental claims that are simply false. The most common examples are products falsely claiming to be ENERGY STAR® certified or registered.
Is there any regulation on greenwashing?
The Australian Securities and Investment Commission (ASIC) has recently issued an information sheet (INFO 271) on how to avoid greenwashing, specifically targeting financial products that claim to be green or promote sustainability . In this document, ASIC recognises the increase in demand for sustainability-related products and states that these products need to be “true to label” and should have clear labelling and definitions of sustainability-related terminology. In addition, communication of sustainability-related products should contain clear explanations of how Environmental, Social, and Governance (ESG) factors are considered and accounted for in investment strategies.
The Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001prohibit making statements or disseminating information that is false or misleading or engaging in dishonest, misleading, or deceptive conduct in relation to a financial product or financial services. An entity is prohibited from making a statement about future matters that is not supported by reasonable evidence. For example, a net zero target by a particular date may be considered misleading if there is no adequate evidence that supports such a statement. The guidelines published by ASIC also include disclosure obligations when an entity is preparing a Product Disclosure Statement (PDS) for a sustainability-related product. These obligations include:
- Section 1013D(1)(I) of the Corporations Act, which provides “where a financial product has an investment component, its issuer must include in the PDS the extent to which labour standards or environmental, social or ethical considerations are taken into account in selecting, retaining or realising an investment”; and
- ASIC Regulatory Guide 65 guidelines.
In addition to Australian regulations, the European Union has recently launched a legal framework that aims to provide a clear definition of which investments or economic activities can be marketed as green or sustainable . The US Securities and Exchange Commission has also announced a task force to investigate compliance issues of ESG funds and identify misstatements in the ESG disclosure processes .
Recent litigations on greenwashing
In August 2022, the first-ever court case that challenges the veracity of a company’s net zero emission target, as well as the first that raises the concern of climate greenwashing against the oil and gas industry, was brought in Australia. The Environmental Defenders Office is acting on behalf of the Australasian Centre for Corporate Responsibility (ACCR), a Santos shareholder, to challenge the company’s claims of ‘clean’ gas and a ‘credible’ decarbonisation pathway to achieve net zero in 2040 . Santos is an Australia-based oil and gas company responsible for approximately 7.74 million tonnes of CO2 equivalent emissions from its direct operations, with the end-use of the natural gas it supplied emitting an additional 28.6 million tonnes of CO2 equivalent between 2019 and 2020. ACCR claims that Santos’ 2020 Annual Report constitutes misleading or deceptive statements under the Corporations Act 2001 (Cth) and the Australian Consumer Law. Santos’ 2020 Annual Report suggests that the company’s natural gas with carbon capture and storage (CCS) is a source of clean energy. However, ACCR counters that this technology will still increase Santos’ overall carbon emission, since it is not practical or commercially viable for Santos to capture all the emissions using carbon capture technology. Moreover, Santos allegedly failed to disclose in its net zero plan that the company does not consider expected production and emission growth from oil and gas exploration opportunities after 2025. Despite all the uncertainties, Santos claimed itself to be a ‘clean energy’ provider in its 2020 Annual Report. Greenwashing litigation has also been brought against organisations in the banking and fashion sectors. For instance, in May 2022, Deutsche Bank and its funds subsidiary DWS were raided due to greenwashing allegations against DWS, which manages 928 billion euros in assets. Prosecutors say that they have gathered sufficient factual evidence that DWS has not considered ESG factors in many investments, contrary to statements in DWS’ fund sales prospectuses. In the fashion industry, the second-largest global fast fashion retailer H&M is facing a class action lawsuit over its environmental promise being deceiving or simply false. An independent investigation showed environmental scorecards for its clothing that were misleading and, in several cases, entirely false. While H&M utilised the Higg Index scores for its products, it was found to be ignoring the negative signs in the scores and thus reporting positive values when they should have been negative . The class action filed in the federal court in New York accused H&M of misrepresenting “the nature of its products, at the expense of consumers who pay a price premium in the belief that they are buying truly sustainable and environmentally friendly clothing”. The lawsuit also challenges H&M’s claims on the legitimacy of its ‘conscious choice’ collection and argues that the company’s recycling program is misleading.