How to Avoid Greenwashing & Its Consequences

Posted by

Laura Evans

on 11 Nov 2022


Greenwashing damages consumer confidence and tarnishes a firm's reputation. With regulators clamping down, we examine how to avoid it.

How to Avoid Greenwashing & Its Consequences

A worldwide study by data agency iResearch revealed that over 50% of financial services businesses believe at least some of their competitors are deliberately greenwashing - a marketing tactic that aims to boost a company's image by giving a false impression about its environmental soundness.

Why? A significant growth in the number of investors and consumers demanding environmentally friendly products has led to organisations making vague, exaggerated or false claims to attract customers.

Understanding greenwashing & avoiding it

Regulatory bodies like the Financial Conduct Authority (FCA) are now clamping down on greenwashing by proposing new rules. These include the introduction of sustainable investment product labels and more accessible disclosure-related information.

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What exactly is greenwashing?

According to the Cambridge Dictionary, greenwashing is "behaviour or activities that make people believe a company's doing more to protect the environment than it is". In 2021, a global review by the Competition and Markets Authority (CMA) found that 40% of firms' green claims could be misleading.

The term was coined in 1986 by Jay Westerveld in an essay he penned on multiculturalism. Westerveld referenced a trip to Fiji, where he saw a note at a hotel asking customers to reuse their towels to reduce ecological damage.

However, Westerveld knew the resort was rapidly expanding: new bungalows were being built with little thought for the environmental impact. They claimed to care about the planet, but their actions said otherwise. In his paper, Westerveld wrote: 'It all comes out in the greenwash.'

Following that, a literary magazine published Westerveld, and the term gained traction with the wider media. Since then, there have been many notable cases of greenwashing, with accusations levelled at high-profile corporations like the Royal Bank of Canada, Volkswagen, Ryanair and Ikea. It generally takes one of three forms:

  1. Deceptive practices: a firm knowingly makes a claim that's untrue or exaggerated.
  2. Negligence: a statement is made about sustainability without checking the facts.
  3. 'Green-wishing': an organisation believes a product has specific eco credentials.
    Reduce Environmental Impact

Why is greenwashing so dangerous?

When firms greenwash, consumers who think they're part of the solution towards a greener future are unwittingly contributing to the problem. Misleading language also undermines trust in sustainability claims as a whole and damages a company's reputation.

In terms of financial greenwashing, businesses and individuals may end up investing in assets that don't align with their ESG policy. By being misled, they inadvertently act unsustainably and against their principles. Moreover, they don't capitalise on legitimate green products.

On top of that, misinformed organisations can't accurately evaluate investment risks, potentially leading to reputational and compliance issues.

What are examples of greenwashing?

PwC calls sustainable finance "the growth opportunity of the century". However, the rise of the environmentally friendly investor has led to unintended negative consequences: an increase in greenwashing. When trying to spot greenwashing, watch out for the following:

  • Overly bold claims
  • Vague language
  • Token gestures
  • Green buzzwords or images
  • Zero evidence to back up claims

These methods rarely hold up to scrutiny when examined in depth, or they misdirect you from the real issues. Examples of financial greenwashing include:

  • Pledges about being carbon neutral by a set date in the future, but in the meantime, the business continues to fund high carbon-emitting projects.
  • Advertising campaigns that promote green initiatives while excluding information about funding organisations with substantial emissions.
  • Express (but unsubstantiated) claims directly communicated to stakeholders regarding a fund's sustainable investing criteria.

Indeed, HSBC recently came under fire when the Advertising Standards Authority banned a series of misleading climate-related adverts and said future campaigns must disclose their contribution to the crisis.

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What are the consequences of greenwashing?

The main consequences of greenwashing include regulatory action in the form of fines and bans on advertising. Over and above the financial damage, greenwashing impacts consumer and investor confidence. Greenwashing severely dents a firm's reputation, which might be irreparable.

How can companies ensure they don't greenwash?

With global ESG assets set to exceed $53 trillion by 2025, it's in everyone's interest to cement the green market as robust and trusted. To achieve that, regulators around the world are taking action.

For example, in 2021, the CMA published the Greens Claims Code to help businesses stay on course and avoid misleading their customers. They outlined six guiding principles to ensure environmental claims:

  1. Are truthful and accurate
  2. Are unambiguous
  3. Don't leave out or hide important information
  4. Compare goods and services in a fair and meaningful way
  5. Take the entire life cycle of the product or service into account
  6. Are substantiated

    Since the guidance was released, the CMA has opened investigations into ASOS,
    Boohoo and George at Asda to analyse their green claims.

Alongside adhering to the Greens Claims Code, additional steps firms should take to avoid greenwashing include:

  • ESG education across the board, from employees to board members
  • Embedding ESG into your business via a tailored strategy
  • Keeping track of evolving laws and regulations
    Reduce Environmental Impact

What is the FCA's response to greenwashing?

In October 2022, the FCA proposed the following new rules to tackle greenwashing and bolster trust in ESG products:

  • Sustainable investment product labels, giving people more confidence to choose the right products and services for them
  • Restrictions on how terms like 'ESG', 'sustainable' and 'green' are used in relation to products that don't qualify for a sustainable investment label
  • General anti-greenwashing rule covering all regulated firms, helping avoid misleading marketing
  • Consumer-facing disclosures, helping individuals understand the core sustainability-related features of a product or service
  • More detailed disclosures, meaning institutional and retail investors can gather in-depth info, should they wish
  • Requirements for products distributors to make sure labels and disclosures are accessible and clear to consumers

The FCA plans to publish the final rules by the end of the first half of 2023. They'll form part of a broader ESG Strategy and Business Plan to protect consumers and improve trust in ESG-focused products and services.

In the meantime, the FCA is investigating how fund managers have responded to expectations outlined in the Dear Chair letter issued in July 2021. Focus areas range from building trust in the market through clear and fair communications to making ESG data easily available.

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What do the FCA's plans mean for regulated firms?

To comply with the FCA's package of measures, companies need a comprehensive and well-executed plan, including evaluating their products and services and familiarising themselves with proposed labels and criteria as well as disclosure types.

This will undoubtedly take time and money to implement effectively, but proactive organisations will reap the rewards by avoiding regulatory scrutiny and reputational risk while building trust.

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