What is greenwashing? How outsourcing your ESG strategy can spell greenwash trouble
7 min read
What is greenwashing?
Greenwashing, first coined in 1986 by environmentalist Jay Westerfield, describes false, misleading or untrue actions or claims made by a business about the positive impact that they or their product or service has on the environment.
Why does this matter? Because customers consistently demonstrate an increased appetite for sustainability, so as a result, regulators are increasingly focusing on this issue where previously it might not have been a priority.
PwC found that 83% of consumers believe companies should be actively shaping ESG best practices. They are looking for businesses to invest and commit resources toward sustainable improvements to both the environment and society. While consumers are happy to reward businesses demonstrating positive and authentic ESG commitment with their custom, they are equally prepared to penalize companies who don’t. Even greater penalties are dished out by regulators when they perceive companies to be benefiting from falsely claiming to be ESG driven.
This doesn’t only impact the bottom line. The “war for talent” was a topic raised in management forums and boardrooms across the world in 2022 as companies fought to attract and retain the best employees. The same PWC research found that 86% of employees prefer to support or work for companies that care about the same issues they do. ESG is now a powerful tool in recruitment.
And it is not just consumers and employees who have an increased appetite for ESG; in 2022 climate tech VC funding increased 89% on the previous year with a total of $70.1bn with investment now 40x greater than a decade ago.
With companies seeing so many benefits in promoting their ESG credentials it’s easy to see why they are keen to “talk the talk”. However, as reporting has progressed from voluntary disclosures to mandated legislation, companies now need to “walk the walk” - and provide evidence that they are doing so.
Until recently, greenwashing was used by campaigners to accuse companies of misleading the public about their activities; now it is levied on companies by legislators across multiple jurisdictions.
In the UK, the Competition and Markets Authority (CMA) has significantly increased its powers and can fine businesses up to 10% of global turnover for consumer protection breaches. It can also impose a penalty of up to £300,000 on individuals.
In the US, Walmart was fined $3 million in civil penalties after the Federal Trade Commission filed a suit against the retailer for what the commission said are "deceptive green claims'' made about some Walmart textile products. The case, also involving Kohl’s, Inc., amounts to the largest-ever civil penalty over such product marketing.
The risks are global. Volkswagen received a $125m fine in Australia for greenwashing the performance of their cars, in addition to the European Commission fine of £750m.
All of the examples cited are cases of intentional greenwashing, intended to defraud and misrepresent the companies’ ESG credentials.
With any act of greenwashing companies leave themselves exposed to:
- Financial risks, such as government fines or falling share prices
- Legal risks, such as lawsuits
- Reputational risks, such as damage to brand equity and bans on advertising their products
Greenwashing isn’t always intentional but the risks and penalties for doing so are the same as if a business had set out to mislead.
With unintentional greenwashing, an organization believes that it’s being environmentally responsible and communicates as much through its marketing and reporting. Unfortunately, their environmental efforts are less effective or less comprehensive than they believe. ESG is a strategic consideration with a need to understand what drives the gap between what companies say - and what companies do.
More worryingly, as ESG is elevated to more senior teams within businesses, some are finding it difficult to live up to promises their predecessors made. Sustainability goals documented when commitments were voluntary, and unlikely to be followed up or monitored, now have an impact on the long-term ESG narrative and authenticity of their actions now.
Organizations go through a process of experimentation as they progress from commitment to implementation. This invariably involves trial and error, which entails failure and learning in that development process.
Seen from the outside, that failure to implement can be perceived as greenwashing. But the real underlying factors are not criminal intent, but learning or lack of resources.
Why ESG materiality is often outsourced to consultants
The demand for analysts, strategists and others knowledgeable about environmental, social and governance issues has never been higher; there is a war on for ESG talent!
Whatever business sector you look at, demand for ESG experts is high; every business is competing in a limited resource pool for ESG expertise.
Consultancies are perceived as having ready access to expertise, access to cross-functional disciplines, objectivity and driving change. All of this is true, but they are subject to the same war for talent as every other business in the evolving ESG materiality field.
In the evolving ESG global legislation, it’s increasingly dangerous to outsource your ESG materiality, and subsequent strategy.
ESG frameworks develop very quickly but do not offer guidance on how to use them. Consultancies work with their own existing processes and by being opaque, means the ownership of ESG does not rest solely within the business. This worked well when these issues were assessed annually or even less frequently. The model struggles when ESG is considered as a strategic tool or a company needs to be responsive to faster moving regulations or global issues like the Ukraine conflict or the Covid pandemic.
These consultants may provide a snapshot analysis but they do not own, or live, your business strategy.
It’s also difficult to get support for complex and material ESG issues, such as the latest European sustainability disclosure rules, when everyone is in the same boat and still learning themselves. With hundreds of evolving cross-jurisdiction ESG factors to consider, the risk of exposure to accidental greenwashing is high if you are not consistently monitoring - which is prohibitively expensive if you are outsourcing responsibility.
Ultimately, you need to own the issues yourself. Consultants can advise on how to build the methodology, and what tools and data sources to use, but ultimately the process must be internalized. A strategic approach to ESG requires more than a static snapshot. Treating it as such means you won't be building the internal capacity to conduct this analysis on an annual basis and monitoring it on a quarterly basis. As a result, you run the risk of perpetuating greenwashing.
Unintentional greenwashing starts with an inadequate assessment of the issues that are most important for your business; with ESG legislation evolving at a dizzying pace the risks of outsourcing complex materiality to external consultancies are obvious.
The reporting provided is often a snapshot of legislation and issues at the time the work is commissioned. You need to track your material ESG issues regularly to ensure your business strategy remains relevant and your risks low.
Outsourcing ESG materiality leaves you with multiple uncertainties:
- Why were those issues chosen?
- How accurately do they align with your corporate strategy?
- Are there more appropriate issues?
- How will the importance of those issues change in the coming years (months)?
- Do you need to tweak or update your approach in between assessments to stay on track?
- How will your strategy change in the coming years?
No C-suite would accept recommendations on financial materiality without a deep understanding of why those specific risk factors were chosen and what the detailed consequences might be. They wouldn’t put their name to claims in their financial statements that they were not wholly comfortable with, and no C-suite would ever sanction financial comments in public without knowing those claims were clear, unambiguous, accurate (and backed by data).
The financial and reputational risk of vague financial claims that cannot be substantiated is simply too great for any C-suite to take those risks. They insist on a deep understanding of the financial materiality that the business strategy is based on - this is usually conducted in house using robust reporting and analysis tools.
Embedding corporate ESG strategy into the DNA of the business should be carried out with the same robust, detailed analysis of all pertinent risk elements in order to avoid the risk of accidental greenwashing.
The best people to build your company strategy are those within your business - no one knows it better. Continuing to rely solely on outsourcing runs the risk of perpetuating greenwashing and leaving business vulnerable.
Taking control of ESG in-house brings your team closer to the issues and risks, and gives greater opportunity to align your ESG strategy within your corporate strategy and avoid unintentional greenwashing.