To understand what ‘Greenwashing’ is, we must first know why at all we are talking about it today. Greenwashing is related to ESG disclosure. ESG is an acronym for Environmental, Social and Governance. It is a framework for understanding and measuring how sustainably an organization is operating. ESG takes the holistic view that sustainability extends beyond just environmental issues. Proper ESG disclosure helps stakeholders like investors, creditors, employees, prospective customers, etc. understand how a company is managing its ESG risks and opportunities. Wrong or misleading ESG disclosures would lead to #greenwashing.
So what is Greenwashing?
The term ‘Greenwashing’ means making outright false, vague, misleading or unsubstantiated claims about the sustainability of a product or service or even about the business operation of the organisation. Greenwashing is often done intentionally by an organisation to market its products or services. However, sometimes such greenwashing may also be unintentional or due to the management’s lack of knowledge or understanding about the same.
In the heydeys of corporate sustainability as a buzzword, greenwashing would essentially mean false and misleading environmental claims or statements. Corporate Sustainability was often used by organisations only as a marketing tool to overstate or misrepresent its environmental initiatives and impacts. But now, with the advent of the new term ‘ESG’ in the corporate jargon, the expanded definition of greenwashing would essentially include false and unsubstantiated claims about the organisation’s social and governance factors as well.
Greenwashing would take place when the management of an organisation would wish their disclosures to give the impression that they have engaged in proper ESG analysis and reporting but when in reality they have not. As stated earlier, this may be intentional or unintentional. So here lies the similarity between greenwashing and ‘window dressing’ of financial statement. In the latter, a much well known concept by now, the management of a company resorts to unfair means to improve the appearance of its financial statements before it is released to the public. It is an established menace, is illegal, and must be avoided at all costs. The same applies to greenwashing.
Why would management tend to engage in Greenwashing?
Today, there is a need of rigorous ESG analysis under the pressure of global business environment. Efforts towards greater sustainability have created the need for organisations worldwide to be more transparent about what initiatives they are taking to manage environmental, social and governance risks. Regulatory bodies and stock exchanges in most countries have mandated ESG reporting. In India also ESG reporting is going to be mandatory for the top 1000 listed companies by market capitalisation from FY 2023-24 onwards as per the SEBI’s newest BRSR framework. The management of these public listed companies are now required to disclose full information about the organisation’s environmental as well as social impact, and its corporate governance practices. Not making the ESG disclosure would not only result in loss of market reputation, but also result in non-compliance.
Under this pressure, greenwashing may actually result from the reckless action of the management (that probably didn’t understand the difficulty level or seriousness level of the ESG disclosure). However, it is also highly probable that some organisations may intentionally include in their annual report false, vague or misleading claims about their initiatives towards sustainability in order to appear to be engaging in proper ESG analysis and disclosure.
How to avoid greenwashing?
Where the management wants to avoid the perception of greenwashing, it must present its ESG disclosures using a widely accepted global reporting framework like the Global Reporting Initiative (GRI), Principles for Responsible Investment (PRI), Carbon Disclosure Project (CDP) or Sustainability Accounting Standards Board (SASB). All these have a standardized system of presentation of ESG information and require organisations to include considerable data and metrics w.r.t. its E, S and G. The good news is that globally initiatives are also being taken to bring out a unified standard for disclosure of ESG.
To understand how to avoid greenwashing better, let us take the individual elements one by one.
(i) Environmental Sustainability – Under this parameter, one may undertake greenwashing by falsely making general claims about improvements in the organisation’s carbon footprint without any actual data to support the claim.
(ii) Social Impact – A company may be charged of greenwashing if it falsely claims about employee training programmes, employee absenteeism, community support initiatives etc.
(iii) Corporate Governance – Non-disclosure of any non-compliance may amount to intentional greenwashing.
Examples of Greenwashing
Some of the most talked about worldwide instances of greenwashing rep
orted in the recent years are as follows:
IKEA – In 2020 the Swedish giant that happens to be the largest wood consumer in the world was found to be using illegally procured wood from the forests of Ukraine that is home to endangered animals. The wood was certified by Forest Stewardship Council that is considered as Gold standard in forest accreditation. IKEA itself is known for its high sustainability standards. However, in this matter both had engaged in greenwashing.
Ryanair – In 2020 this airlines company was charged of greenwashing when they falsely claimed themselves to be ‘lowest emissions airline’.
McDonald’s – In 2019 McDonald’s introduced paper straws as a sustainability initiative. But the straws turned out to be non-recyclable. Not only that, the raw material for the paper for straws was procured by mass cutting down of trees.
KLM Airlines – In 2021-22 a lawsuit was filed against this air carrier for their misleading ‘carbon emission free’ claims. Their slogans was ‘Be a hero, fly CO2 zero’.
Volkswagen – In 2015 Volkswagen admitted to cheating emission tests by fitting its vehicles with a certain device that had a software to reduce emissions during tests. However in reality, the vehicles were emitting more than 40 times the allowable limit for pollutants.
Nestlé – In 2018 this company was called out for greenwashing when it claimed its packaging material to be 100% recyclable and reusable by 2025. It was stated that this claim was ‘greenwashing baby steps to tackle a crisis it helped to create’.