What is Greenwashing? Why Should Large Enterprises Care?
An advertisement for a fashion brand claims its new range of products is sustainable and eco-friendly when it is not. A food and beverage brand claims to use recycled material in its packaging when it does not. An automobile manufacturer claims to have reduced emissions by introducing new processes without any data to support the claim.
All these brands are guilty of greenwashing.
What is greenwashing? The term was coined in 1986 by environmentalist Jay Westerveld and is a play on the word ‘whitewashing’, which means concealing incriminating information. Greenwashing refers to the practice of making misleading or exaggerated environmental claims about a product or company in order to appear more environmentally friendly than they actually are, or without adequate evidence-backed data. Greenwashing has become increasingly common as regulators, consumers, and investors demand greater environmental responsibility from businesses. A July 2021 report by Changing Markets Foundation found that nearly 59% of green claims by fashion brands in the EU and UK were misleading. The phenomenon is not unique to any single industry, and companies across sectors have made misleading or exaggerated claims to bolster their green image. Almost 72% of North American C-Suite respondents in a Harris Poll for Google Cloud said their company had overstated its sustainability efforts.
Greenwashing has the potential to significantly damage an enterprise’s reputation and expose it to legal action, not to mention erode the trust of customers and investors. Most critically, greenwashing allows enterprises to appear sustainable and keeps them from taking concrete steps to reduce their emissions.
Why do enterprises greenwash?
Greenwashing is a means for enterprises to mislead regulators and stakeholders about their environmental practices, policies, and products, whether intentionally or unintentionally. Unintentional greenwashing often occurs due to a lack of regulations.
Enterprises might engage in voluntary greenwashing for a variety of reasons, including:
- Appearing compliant with regulations: Enterprises may conceal or misrepresent information about their carbon emissions to avoid regulatory action.
- To earn consumer trust: Consumers increasingly prefer and are willing to pay more for sustainable products. Nearly 66% of all respondents (and 75% of millennials) in a Mckinsey survey said they consider sustainability while buying a luxury product.
- Misinforming investors about growth: Sustainable investing is growing in popularity, and more and more investors are considering the environmental track record of a business when evaluating its investment potential.
- Lack of mandatory requirements: Voluntary initiatives do not have the consistency and accountability mechanisms required to create a level playing field for all companies. Moving from voluntary to mandatory climate disclosures is key for addressing greenwashing in a systematic manner.
- Lack of regulations: To effectively tackle greenwashing and ensure a level playing field, enterprises need to move from voluntary initiatives to regulated requirements for net zero. This lack of regulation can cause enterprises to engage in unintentional greenwashing. As per this UN report which outlines key steps to avoid greenwashing of net zero targets, regulators should develop regulations and standards starting with high-impact corporate emitters, including private and state-owned enterprises and financial institutions.
Enterprises practice greenwashing when they want to be seen as environmentally responsible but do not want to make the investments or changes required to reduce their carbon footprint.
How do companies greenwash?
Greenwashing takes many forms – be it false claims about products or operations or cherry-picking data or inaccurately reporting emissions.
- Incomplete information: Companies may use incomplete information or cherry-pick data to make their products appear more environmentally friendly. For instance, a company may make a big deal about its recycled packaging while its manufacturing process is carbon intensive.
- False or exaggerated claims: Companies may also make exaggerated claims about the sustainability of their products. For instance, a product labelled natural or organic may contain damaging chemicals.
- Vague claims: Companies may use vague or meaningless terms such as "green" or "eco-friendly" to mislead consumers. These terms have no clear definition and can be used to market products that are not truly environmentally friendly. However, Green Taxonomy regulations are starting to deal with this labelling concern, especially in the finance sector.
What are the risks of greenwashing?
Greenwashing exposes companies to multiple risks.
- Legal risks: Governments and regulatory bodies around the world are taking a serious view of greenwashing. Be it the US Federal Trade Commission’s Green Guides or the EU’s European Green Deal. With such stringent systems in place, enterprises might face severe consequences for making false or misleading claims such as lawsuits or fines. In France, for instance, enterprises can face imprisonment of up to two years and a fine of up to €300,000 for violating the newly introduced Climate and Resilience Law.
- Reputational risks: Greenwashing can significantly damage a company’s reputation, leading to losses and erosion of trust among customers, investors, and employees.
- Business risks: There are many examples of greenwashing, when exposed, leading to expensive product recalls and bans. It can also adversely impact a company’s relationships with its partners and suppliers, who may stop doing business with it.
How can businesses avoid greenwashing?
Greenwashing is a systemic problem, and can sometimes be caused by inadequate investment in measurement and regulations. In Terrascope’s experience, more than 90% of companies fail to accurately measure their emissions and are, therefore, prone to the risk of misreporting their data. To prevent greenwashing, businesses must set up robust carbon measurement and accounting practices. The UN report posits that increasing transparency and accountability helps to build trust and encourage others in the industry to make commitments. Generating clear, accessible, comparable data can bring enormous benefits. Not only will this allow stakeholders to identify barriers in their measurement and reporting, but it will also allow enterprises to credibly and accurately showcase their sustainability progress.
Terrascope combines sustainability expertise with machine learning and data science to help businesses avoid intentional or unintentional greenwashing. The platform helps enterprises accurately measure carbon emissions throughout their value chains. Here are some other steps that enterprises can take to steer clear of this practice -
- Understand emissions throughout the value chain: A first step towards accurate reporting is a comprehensive emission audit covering Scope 1, 2, and 3, across upstream and downstream activities. This will help the company identify emission hotspots and set accurate baselines.
- Work with suppliers and partners to get accurate data: One of the key reasons for misreporting of emissions is inaccurate supplier data. Large enterprises must take the responsibility of building a culture of sustainability and transparency with their partners and suppliers.
- Invest in the right technology tools: Measuring emissions is a complex undertaking. However, platforms like Terrascope provide companies with the technology required to measure and report their emissions with confidence.
- Standardise reporting: Enterprises should report their emissions according to accepted global standards such as The GHG Protocol and The Task Force for Climate-Related Disclosures (TCFD).
- Use third-party verification and certification: Regular third-party audits and certifications such as LEED and ISO 14001 can bring greater transparency to a company’s sustainability reporting.
How can Terrascope help?
Terrascope helps large enterprises avoid greenwashing by providing them with a robust platform and methodology to accurately measure carbon emissions throughout their value chain. Large enterprises can use the SaaS-based platform to make data-driven decisions, set realistic reduction goals, and start the journey to net zero with confidence.
To get in touch with our emissions measurement expert, click here.