Not every company and product that claims, or is associated with, good sustainability performance is actually performing well on sustainability, with the result that stakeholders are misinformed. The motivation for false claims is that sustainable businesses are more valuable, but the consequence is that the true environmental and humanitarian costs of doing business are hidden.

This article explains the prevalence of greenwash, its various forms, the terms used for different types of greenwash. It also asks, does greenwash pay? (4 min read).

Prevalence

As a company, if you ignore sustainability, you’re going to be worth less.’
Goldman Sachs

Greenwash is rife:

  • 98% of products make misleading environmental claims (TerraChoice Environmental Marketing, 2009)
  • 75% of companies that report on the SDGs discuss the impact their business has on the goals, but most discus their positive impacts and not the negative (KPMG, 2018 (pdf)).
  • Interviews with 33 socially responsible and impact (SRI) investment practitioners found the impression that sustainability reports are used by companies to ‘highlight the positive aspects of their sustainability performance and to obfuscate negative outcomes’ (Boiral, 2014).
  • Studies show that obvious greenwashing is negatively correlated with trust, yet the consumer must be convinced that an organisation has deliberately lied before reputational repercussions become significant (de Jong et al, 2019). Unfortunately, neither factual discrepancies nor corporate intentions are obvious to most consumers, so businesses are continuing with product greenwash, unchallenged (The Spinoff, 2018).

The tragedy of these falsehoods is that the true environmental and humanitarian costs of doing business are hidden, companies benefit reputationally and financially when they should not, and funds intended for impactful purposes end up in the wrong hands, slowing real progress on sustainable development (The Guardian, 2019).

Stakeholders have found that scrutiny, with the threat of divestment or prosecution, is the best mitigant against greenwash, particularly of serial offenders.

  • In 2019, investors with AU$6.5 trillion in assets under management asked 47 of the world’s biggest greenhouse gas emitters to align their climate efforts with the Paris Agreement’s climate goals, warning that lobbying activities that are inconsistent with meeting climate goals are an investment risk (Ceres, 2019). One of the investors’ target companies is ExxonMobil. Since the 2015 Paris Agreement, ExxonMobil has been telling one story while supporting another. It has spent US$1 million to support Americans for Carbon Dividends, which is a bipartisan initiative to impose a gradually rising carbon tax that would return rebates to citizens starting at around US$2,000 a year for a family of four. But the company has also spent US$100 million on opposing binding climate regulations and promoting fossil fuel energy policy, and, in 2018, spent US$56 million on pro-climate branding (InfluenceMap, 2019).
  • A class-action lawsuit was filed in 2019 against Nestlé USA for allegedly deceptively labeling chocolate products. According to the complaint, phrases such as “sustainably sourced” misled consumers on cocoa that comes from farms that use child and slave labor, not to mention that the chocolate industry destroys rainforests in West Africa and uses chemicals that pollute waterways, kills wildlife, and harms communities (Truth in Advertising, 2019). This follows criticism of Nestlé in 2104 that its customised recycling program for Nespresso disposable coffee pods had a negligible overall impact on waste reduction.

Forms

Greenwash takes many forms:

  • taking credit for actions that are actually minimum legal requirements
  • omission of negative information
  • selective disclosure of benign negative impacts to create an impression of transparency
  • framing corporate messaging in ways that mischaracterise actions and events
  • vague or ambiguous claims that are hard to disprove
  • misuse of images and other cues, such as NGO alliances, to suggest sustainability-related values
  • mischaracterisation of the extent to which sustainability is actually integrated into the business, in terms of purpose, values, strategy, policies, standards, practices or levels of investment
  • deceptive manipulation
  • outright lies and false claims, which may be mixed among truthful claims
  • fraud

Terminology

The term ‘greenwash’ was only coined in the mid 1980s and still lacks a strict definition, but it always refers to a difference between symbolic sustainability and substantive sustainability that leaves stakeholders misinformed.

Three ‘colour’ terms describe differences between claims and actions:

  • Greenwash means environmental claims exceed actual environmental actions; it’s also an umbrella term for all types of false claim about sustainability performance
  • Bluewash is an alternative term, meaning that societal claims exceed actual societal actions (the colour reference is derived from the UN flag)
  • Brownwash is a term you might hear. It’s the opposite of greenwash, ie actual environmental actions exceed environmental claims. A company might choose to downplay its environmental credentials if it perceives that the market is penalising expenditure on green initiatives (Kim and Lyon, 2014)

Payback

Does dishonesty about unsustainability pay off?

Maybe not. The nexus between greenwash and financial performance is a surprisingly understudied area of business; however, multiple studies show that greenwash is negatively correlated with financial performance (eg Walker and Wan, 2011). This could mean that companies that indulge in greenwash are more likely to have poor financial performance, or it could mean that companies with poor financial performance are more likely to indulge in greenwash (de Jong et al, 2019).

Probably not. An investment model of a hypothetical firm found only limited circumstances where greenwash pays off, surmising that the risk of being caught greenwashing acts as a negative call option on the increased value of the firm (Gregory, 2020).

Definitely not. A study of firms on the Chinese stock market found significant market backfire effects from exposed greenwash (Du, 2014). Volkswagen’s 2015 ‘dieselgate’ scandal (BBC, 2015) is the most infamous example of sustainability fraud (KPMG, 2020). VW has reported that the scandal cost the company US$34.69 billion (Reuters, 2020), including payments and provisions for fines, settlements and direct compensation (FT, 2020).

Does honesty about unsustainability pay off?

Maybe. A study of the three-way relationship between carbon emissions, carbon disclosures and financial performance found that while carbon emissions are negatively related to financial performance, disclosure of carbon emissions is significantly positively related to financial performance, mediating the negative effects of emissions (Liu et al, 2016).


Author: Jennifer Wilkins
Last updated: October 19, 2020