With the increased focus on environmental, social and governance ("ESG") policies by regulators, investors and businesses comes an increased risk of investigations and disputes over false or misleading ESG disclosures. This is known as "greenwashing".
We outline below what greenwashing is, how it occurs and how it can be avoided. We also outline some 'top tips' to help mitigate greenwashing risk.
What is it?
- Greenwashing is where a company makes false statements about its ESG practices to appeal to customers interested in environmentally friendly and sustainable practices.
- In most cases, greenwashing is used to convince the customer that a company has a positive ethical or environmental impact in order to appeal to them.
- It is considered to be a marketing gimmick intended to mislead customers who prefer to buy goods and services from environmentally conscious brands.
- In many cases, companies will spend more money on marketing the sustainability of their products than actually making the environmentally friendly and sustainable changes to their business that they profess to be implementing.
How does it occur?
Most examples of greenwashing occur as a result of poor language choices, whereby companies use certain words or phrases to appeal to eco-conscious customers that imply sustainability even though their products or practices are not sustainable, or are not sustainable to the degree asserted by these companies. Examples can include exaggerated claims about carbon neutrality or misleading advertising tactics that use green colour schemes and images.
Greenwashing typically falls into three categories of misrepresentations:
- Corporate and governmental commitments: For example, a global energy provider has been accused of misleading consumers in its public commitment to reach net-zero carbon emissions by 2050 given its plans regarding a multi-billion-dollar oil project in Africa and involvement in the production of fossil fuels.
- Product attributes: A securities class action was filed against a food and beverage company, whereby shareholders claimed that the company had misrepresented the environmental benefits of its production methods in its regulatory filings. The company claimed that its techniques were environmentally friendly, but the claimants argued that, in actual fact, the company's production processes exhibited nearly equivalent greenhouse gas emissions, required similar land usage, and utilised suppliers that produced dangerously high volumes of wastewater.
- Disclosure of climate change investments and related financial risks: Enforcement action was brought against one of the world's largest iron ore producers in relation to alleged false and misleading claims about the safety of its dams.
The European Commission does an annual "sweep" of websites to screen for potential breaches. Last year, the European Commission, for the first time, focussed their sweep on greenwashing. It was estimated that in 42% of cases, the claims made by the companies that were screened could amount to greenwashing.
Why do companies do it?
- To deflect attention away from unsustainable practices: A multinational oil and gas corporation advertised its experimental algae-based biofuels despite setting no company-wide net-zero target.
- To attract new eco-conscious customers or investments: An energy corporation advertised its efforts to protect wildlife and water resources at the same time as it was being sued for illegally dumping pollutants.
- To gain eco-friendly credibility in the public eye: This is often performed by making logos green or incorporating landscapes into an advertisement. A water bottling company's campaign came under criticism because the company allegedly transported its water up to 10,000 miles from the source before being consumed.
How can you avoid it?
- Language: Avoid terms with no clear meaning. Marketing claims such as "sustainable" or "powered by 100% renewable energy" could, unless wholly accurate, result in greenwashing litigation.
- Images: Avoid images that give an unjustified green impression or ones that cannot be sustained.
- Greenhushing: Avoid stating that you are taking positive action in one area, while negatively contributing to another. This may include, for example, manufacturing fast chargers in a high emissions factory.
- Scopewashing: Avoid reporting the extent of your emissions in a misleading way, for example, by sharing direct emissions from your factory, but not reporting indirect emission from energy transport and materials.
- Make statements clear and easy to understand: Include details such as specific units of measurement e.g. "70% organic cotton" rather than "made with organic cotton".
- Back up claims with data: Keep current data available and update it on your website and anywhere you make sustainability claims. Only use data that can be verified. Obtain credible third-party certification from credible sources.
- Compare "apples with apples": When comparing your product's sustainability to that of a competitor, make sure to compare the same type of product to avoid misleading customers.
- "Walk the walk": If you want to market your product as eco-friendly, you need to ensure that you have sustainable practices in your manufacturing, waste disposal, and distribution operations.
- Seek advice: If in doubt, seek advice from your external counsel or ESG consultants. Greenwashing litigation can cost significant time and money and cause serious reputational damage.