Addressing Greenwashing Amid Growing Climate Action

With climate action gaining momentum, sustainability has become a critical focus for stakeholders such as investors, regulators, and consumers. Companies now commonly disclose their environmental and social performance through reports like sustainability, ESG (environmental, social, governance), and integrated reports, often aligned with frameworks like Global Reporting Initiative (GRI) and Task Force on Climate-related Financial Disclosures (TCFD). However, the pressure to meet expectations has led to the rise of greenwashing—misleading claims about environmental efforts. Coined by Jay Westerveld in 1986, greenwashing involves promoting a product or service as eco-friendly without substantiating these claims. It undermines genuine climate action by promoting false solutions, distracting from credible efforts, and delaying necessary changes. [1]

Greenwashing tactics include vague language, misleading labels, and overstating minor improvements. The complexity and lack of standardized reporting frameworks further allow greenwashing to thrive. The European Commission's investigation in 2021 found that 42% of online green claims were exaggerated or deceptive. As ESG reporting becomes mandatory, especially for publicly traded companies, accurate and transparent disclosures are crucial to avoid reputational damage and maintain stakeholder trust. With greenwashing as a barrier to meaningful climate action many countries and India alike have put forth rules and regulations to tackle this issue. [2]

Deceptive Greenwashing Tactics and ESG Misrepresentation

Greenwashing can take many forms like false representation when a company markets a product or service as "green" without meeting ESG criteria and lacking the data to back up the claim. A failure to disclose information involves a company asserting its products are "green" while concealing details that would disprove this claim. Companies may also engage in dishonest practices by exaggerating the strength of their ESG programs to gain green credentials, increasing their chances of forming new partnerships. Additionally, directors may make inaccurate and misleading ESG claims in financial statements, a growing risk as their incentives increasingly tie to ESG metrics. Fraudulent trading involves misleading investors by inaccurately presenting a product's green credentials, and misaligning with the investor's objectives.

In 2017, the ASCI prohibited Bharat Petroleum from running an ad claiming “Go Green With Speed For IT Reduces Emissions” because the environmental claims made were not supported by evidence. [8]

In 2022, the SEC fined an investment advisory firm over $1 million for misleading statements and omissions related to ESG considerations. From 2018 to 2021, the firm falsely claimed that all investments in its funds had undergone an ESG quality review, although this was not consistently true. [7]

Global Strides Against Greenwashing

The European Union is advancing stricter measures to combat "greenwashing" through the proposed Green Claims Directive (GCD). This directive aims to prevent companies from making false or misleading environmental claims by requiring thorough assessments and substantiation for any explicit environmental claims. Businesses must provide transparent information, such as lifecycle considerations and scientific evidence, and undergo third-party verification. Noncompliance may lead to significant fines, revenue confiscation, and exclusion from public procurement. The GCD also introduces new governance criteria for environmental labels and emphasizes transparency and stakeholder engagement. [9]

Globally, other regions are also taking action against greenwashing. For example, South Korea has introduced a draft law that imposes fines for false green claims, signalling a shift towards stricter regulation of environmental marketing. The UK's Competition and Markets Authority (CMA) has also issued a code to ensure that environmental claims are substantiated and clear, though this is a voluntary code with enforcement based on existing consumer protection laws. [10, 11, 12]

India’s Push to Tackle Greenwashing

Like other countries, India is also stepping up in its efforts to combat greenwashing with draft guidelines that define the practice as making deceptive or misleading environmental claims. These guidelines, called Guidelines for the Prevention and Regulation of Greenwashing, 2024, will apply to all advertisements and require companies to fully disclose environmental claims, ensuring they are backed by verifiable evidence. The guidelines also emphasize transparency in presenting data and mandate that vague terms like "green" or "eco-friendly" be used only with adequate disclosures. [13]

This is in addition to existing regulations and voluntary codes, such as those enforced by the Securities and Exchange Board of India (SEBI), the Consumer Protection Act 2019, and the Advertising Standards Council of India (ASCI), which provide some oversight. SEBI has issued circulars mandating disclosures and third-party verification for green debt securities to prevent greenwashing. Additionally, the Bureau of Indian Standards (BIS) and the Ministry of Environment, Forest and Climate Change (MoEFCC) have initiatives to promote environmental awareness and prevent misleading claims. [8]

Businesses in India are encouraged to adopt sustainable practices and ensure that their environmental claims are substantiated. They should integrate sustainability into their business strategies, seek third-party certifications, and be prepared for stricter regulations in the future. Media campaigns can play a significant role in both exposing greenwashing and recognizing genuine efforts, helping to build consumer trust and maintain corporate reputation. 

Way forward

As India intensifies its efforts against greenwashing, businesses must proactively ensure their environmental claims are credible and substantiated. The evolving regulatory landscape, including SEBI's mandates and upcoming guidelines, underscores the need for transparency and accuracy in green marketing.

To stay ahead, companies should embed sustainability into their core strategies, backing every claim with verifiable evidence and aligning with global standards. Seeking third-party certifications and maintaining rigorous internal checks will not only prevent greenwashing but also build consumer trust and enhance brand reputation.

The demand for accountability is rising among consumers, investors, and regulators. Indian businesses must now lead by example, embracing genuine sustainability practices. The actions taken today will shape the future business landscape, with those prioritizing authenticity and transparency emerging as leaders in this new era of sustainable commerce. Greenwashing poses a serious risk to organizations, potentially undermining substantial shareholder value. Companies need to address and mitigate their greenwashing risks to protect themselves actively. Firms should prepare for more stringent enforcement and penalties as regulatory frameworks evolve. Reach out to Carbon Mandal to gain insights on science-based climate action for your reporting needs. 

References:

  1. ICSI (2023). Green Washing and Green Blushing. https://www.icsi.edu/media/webmodules/CSJ/April/11ArticleManojSonawala.pdf Accessed 28th August 2024
  2. Ernst & Young (2024). Failure to prevent and how it could impact greenwashing. https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/topics/assurance/corporate-governance-and-reporting/latest-insights/ey-failure-to-prevent-and-how-it-could-impact-greenwashing.pdf  Accessed 28th August 2024
  3. United Nations. Greenwashing – the deceptive tactics behind environmental claims. https://www.un.org/en/climatechange/science/climate-issues/greenwashing Accessed 28th August 2024
  4. Corporate Finance Institute. Greenwashing. https://corporatefinanceinstitute.com/resources/esg/greenwashing/ . Accessed 28th August 2024
  5. PricewaterhouseCoopers (2022). Fake sustainability harbours risks Greenwashing. https://www.pwc.de/en/forensic-services/esg-fraud/greenwashing.html Accessed 28th August 2024
  6. International Consumer Protection and Enforcement Network, ICPEN (2021). Screening of websites for 'greenwashing': half of green claims lack evidence. https://icpen.org/news/1146 Accessed 28th August 2024
  7. Ernst & Young (2023). Greenwashing Investigations: Unmasking Deceptive ESG Practices. https://www.ey.com/en_ch/disrupting-financial-crime/greenwashing-investigations-unmasking-deceptive-esg-practices Accessed 29th August 2024
  8. ICSI (2024). Green to Greed: Unravelling Corporate Deception. https://www.icsi.edu/media/webmodules/CSJ/April_24/23.pdf . Accessed 29th August 2024
  9. Ernst & Young (2024). European Parliament adopts new rules on green claims. https://taxnews.ey.com/news/2024-0607-european-parliament-adopts-new-rules-on-green-claims  Accessed 29th August 2024
  10.  PricewaterhouseCoopers. CMA Green Claims Code now in effect. https://www.pwc.co.uk/services/legal/cma-green-claims-code-now-in-effect.html . Accessed 29th August 2024
  11. Gov.UK (2021) Guidance - Making environmental claims on goods and services. https://www.gov.uk/government/publications/green-claims-code-making-environmental-claims/environmental-claims-on-goods-and-services . Accessed 30th August 2024
  12.  Reuters (2023). Asia and Australia target greenwashing as companies risk penalties. https://www.reuters.com/article/markets/oil/asia-and-australia-target-greenwashing-as-companies-risk-penalties-idUSL8N3672FQ/ . Accessed 30th August 2024
  13. Central Consumer Protection Authority (2024). Guidelines for the Prevention and Regulation of Greenwashing, 2024. https://consumeraffairs.nic.in/sites/default/files/file-uploads/latestnews/Draft%20Guidline%20with%20approval.pdf . Accessed 30th August 2024