Apr 04, 2024
Sustainability credentials are big business in 2024, but not all are genuine. Dee Moran looks at ongoing EU efforts to curb greenwashing through regulation
Over the last number of years, investors, consumers and regulators have put companies under increasing pressure to be ‘green’.
Being green is big business. Consumers will pay a premium for sustainable products and investors are increasingly looking to invest in companies that are perceived as sustainable. Banks also want to lend to businesses showing green credentials.
This desire to be ‘green’ has, unfortunately, led to some entities not being wholly truthful about, or exaggerating, their green credentials. So-called ‘greenwashing’ has become so widespread that many stakeholders – including investors, regulators, consumers and company directors – are calling for action to curb it.
The latest PwC Investor Survey, published in January 2024, included responses from 345 investors and analysts in 30 countries – including 38 who invested in, or covered, companies in Ireland.
Ninety-seven percent of this 38-strong cohort believe that corporate reporting on sustainability performance contains unsupported claims. Globally, the corresponding figure stands at 94 percent.
The characteristics of greenwashing
So, what is greenwashing? There is no global definition of ‘greenwashing’ but, in essence, it involves misleading consumers by giving a false impression of a product’s environmental impact or benefits.
It can be unintentional. One example is the use of vague and unspecific language, such as describing a product as ‘eco-friendly’ due to its use of recycled packaging while not conducting any actual research into the sustainability, or otherwise, of the raw materials used in that product.
Or, it can be intentional greenwashing, such as the Volkswagen scandal, whereby the German car manufacturer was found to have intentionally rigged its emissions testing to deliver greener results.
When this came to light in 2015, Volkswagen’s share price fell by 20 percent, wiping more than €13 billion off its capitalisation.
Greenwashing has become so prevalent that Planet Tracker, the UK-based sustainable finance think tank, has identified six distinct types: greencrowding; greenhushing; greenlabelling; greenlighting; greenrinsing; and greenshifting.
Greencrowding is where an entity adopts a group initiative, such as forming an alliance, and then progresses at the pace of the slowest participant. While collaboration with other entities in a similar industry to create goals for sustainability initiatives can be beneficial, joint statements need to be clear about what will be achieved. Otherwise, tracking progress can become challenging.
Greenhushing is where entities deliberately underplay, under-report or hide their environmental, social and governance (ESG) or green credentials to evade scrutiny because, for example, their sustainability practice might not be as impressive as claimed.
Greenlabelling is where entities call a product or service ‘green’ or ‘sustainable’ but there is no evidence to support the assertion.
Greenlighting is where an entity focuses its marketing on a particularly green feature of its operations or products, diverting attention from other damaging environmental practices.
Greenrinsing is where entities modify their ESG targets before they are achieved, thereby avoiding being held accountable for, or actually achieving, their goals.
Greenshifting is when entities imply that the consumer is at fault and shift the blame on to them.
The potential effects of greenwashing
The effects of greenwashing vary from fairly harmless to potentially very serious.
The more consumers hear about greenwashing, the less likely they are to believe any green claims made by companies and organisations as is evidenced in the PwC Investor Survey, outlined above.
Consumers purchase sustainable goods and services to play their part in protecting the environment, but greenwashing disrupts this, and consumers become cynical.
Furthermore, entities engaging in greenwashing tactics potentially harm not just themselves, but all other entities engaging with sustainable practices and particularly those companies with genuine green products or operations. Once trust is lost, it is hard to regain.
EU actions to mitigate greenwashing
Regulation to prevent greenwashing has, until recently, been limited. Much of the enforcement has been performed by advertising regulators who have moved to ban misleading greenwashing ads, for example.
In the UK, Unilever placed an advertisement claiming that Persil laundry detergent was ‘kinder to our planet’ but didn’t explain how and, consequently, it was banned by the Advertising Standards Authority on the basis that the claim was unsubstantiated.
The Advertising Standards Authority of Ireland (ASAI) received 28 complaints about a sponsored article in which a celebrity referred to the use of the Land Rover Defender as “planting the seeds of a more sustainable life”.
This was held to be in breach of the ASAI Code on the basis that “evidence demonstrating that the vehicle justified being associated with sustainability claims, albeit qualified, has not been submitted.”
Where the article asserted that “mild hybrid tech cuts down on the amount of fuel,” the ASAI found that this was likely to mislead consumers due to the omission of a comparison with any other mode of transport. The ASAI then concluded that the claim should not be used again in its current format.
The European Union (EU) is very focused on reducing greenwashing and lending transparency to corporate behaviour. Some of the regulations that have been – or are in the process of being – approved are outlined below.
Sustainable Finance Disclosure Regulation
The EU’s Sustainable Finance Disclosure Regulation (SFDR), introduced in 2021, requires financial market participants and financial advisors to evaluate and disclose sustainability-related data and policies at entity, service and product level.
The aim is to provide standardisation of the language used and to categorise investment products by how sustainable they are. Disclosure requirements are applied to each category.
Under the SFDR, all funds are classified into one of three categories:
- Article 6 Funds need not incorporate any sustainability information into the investment process (for example, oil producers).
- Article 8 Funds should promote environmental characteristics and have good governance practices.
- Article 9 Funds should make a positive impact on society or the environment through sustainable investment and have a non-financial objective at the core of their offering.
In its February 2024 Regulatory and Supervisory Outlook Report, the Central Bank of Ireland (CBI) referred to “a new phenomenon of understating how green a product is, known as ‘green bleaching’”.
Green bleaching can occur where a fund management company does not want to risk non-compliance with the more onerous requirements of Article 9.
Therefore, it categorises a fund under a category with less onerous requirements, which results in inaccurate disclosures.
The CBI report also highlighted one of the priority initiatives in addressing climate change and net-zero transition as “scrutinising and mitigating the risk of greenwashing in the promotion and sale of financial products to investors”.
The EU Taxonomy Regulation
The EU Taxonomy Regulation is a classification system establishing a list of environmentally sustainable economic activities; essentially, a common language for everyone.
It establishes six environmental objectives:
- Climate change mitigation;
- Climate change adaptation;
- Sustainable use and protection of water and marine resources;
- Transition to a circular economy;
- Pollution prevention and control; and
- Protection and restoration of biodiversity and ecosystems.
In order to be considered aligned with the taxonomy, an entity must adhere to at least one of the environmental objectives and the related technical criteria, do no significant harm to the other objectives and meet minimum safeguards regarding human and labour rights.
Disclosure obligations will apply from 1 January 2024 with respect to the 2023 financial year. In theory, this should create security for investors and help companies become more climate friendly. It should also prevent market fragmentation – something that has caused issues in the past.
Corporate Sustainability Reporting Directive
In terms of reporting, the Corporate Sustainability Reporting Directive (CSRD) – which commenced on 1 January 2024 for certain companies – is focused on improving transparency, particularly with the disclosures required to be made under the directive.
While it has not been stated that the CSRD will specifically prevent greenwashing, it will make greenwashing more difficult, given the significant requirements of the directive. These include the following:
- The framework underpinning the CSRD is the European Sustainability Reporting Standards (ESRS), which is a set of 12 standards covering ESG metrics. Entities will have to report on their ESG metrics, as will their competitors, making information more comparable and therefore more transparent and less prone to exaggeration, omission or suppression.
- The requirement to complete a double materiality assessment whereby a company must consider its impact, not only from a financial perspective, but also from the perspective of its impact on people and the environment.
- There are a significant number of additional requirements over and above those required under the Non-Financial Reporting Directive or the voluntary frameworks, both quantitative and qualitative, which will leave less room for ambiguity and the individual interpretation of sustainability information.
- Mandatory independent assurance of company ESG information will be required under the CSRD. Initially, this will be limited assurance, but it is expected that reasonable assurance will be required by 2028. Therefore, companies will need to ensure that they have in place appropriate processes and controls – similar to financial reporting – so that they are in a position to comply with the new regulatory obligations. The requirement for external assurance should, above all, bring with it the trust investors have been looking for.
As a single framework, the CSRD will bring increased comparability to ESG reporting, greatly assisted by the mandatory electronic XBRL tagging of the report. Investors will now be able to compare information provided by companies and make investment decisions based on this information, which will be more granular in nature, thereby offering a higher level of detail.
Draft Green Claims Directive
The Green Claims Directive is the latest piece of regulation introduced by the EU to tackle greenwashing and is an important step in increasing transparency and trust in relation to environmental claims.
The European Commission first proposed this directive in March 2023 following the publication of a joint report by the European Parliament’s environment and internal market committees.
The report followed a European study in 2020, which found that more than 53 percent of environmental claims in the EU were misleading, vague or unfounded.
The proposals for the Green Claims Directive include:
- Setting out detailed rules on substantiating and communicating explicit environmental claims;
- Ensuring that companies carry out an assessment to substantiate environmental claims on a host of requirements – if the claim concerns the whole product or a part of it, for example, reporting greenhouse gases offsets in a transparent way and looking at all significant environmental aspects and impacts;
- Potential penalties, such as a temporary exclusion from public procurement tenders or fines of at least four percent of annual turnover.
The directive is due to come into force on a gradual basis, depending on company size, from 1 January 2026.
Proactive approach
All of these developments are very positive and demonstrate the EU’s proactive approach to regulating against greenwashing.
The European Parliament’s rapporteur for the Environment Committee, Cyrus Engerer, has said, “it is time to put an end to greenwashing. Our agreement on this (Green Claims) text ends the proliferation of deceitful green claims which have tricked consumers for far too long.”
Regulation will work only if there is enforcement, however. Individual countries need to ensure that they have the processes in place to punish those who do not adhere to the regulations.
Dee Moran is Professional Accountancy Lead with Chartered Accountants Ireland
This article was first published by Chartered Accountants Ireland at the following URL: https://www.charteredaccountants.ie/Accountancy-Ireland/Home/AI-Articles/stemming-the-tide-of-greenwashing-lies
