What is Greenwashing

Greenwashing is on the rise as an increasing number of stakeholders – from investors and board members to consumers, staff and regulators – demand that companies take positive climate and environmental action.

What is greenwashing?

Greenwashing is where companies make misleading or unsubstantiated claims about products or activities in order to appear more environmentally friendly than they really are. Financial think-tank Planet Tracker has identified six types of greenwashing: Greencrowding, Greenlighting, Greenshifting, Greenlabelling, Greenrinsing and Greenhushing.

Greenwashing and risk

Greenwashing is reputationally dangerous and is unethical. It also presents multiple long-term risks to businesses and society. It weakens the efforts of those businesses actually working to improve their impact and create a better world. It misleads consumers looking to buy genuinely environmentally friendly products or to trade with environmentally minded companies. It risks eroding investor trust at a time when sustainable investment funds are gaining increased popularity (the IMF noted in October 2021 that up to $20 trillion of new sustainable investments would be required to achieve global climate goals by 2050). Greenwashing can damage a company’s valuation (the Volkswagen emissions-test scandal caused an almost 20% drop in the price of its shares and wiped more than €13bn off its market capitalisation) and it puts companies at risk of rebuke or investigation (HSBC, Tesco, Asos, Boohoo and George at Asda were all investigated over their eco-friendly claims.)

Greenwashing also puts companies at risk of incurring penalties and/or fines from lawsuits for making fake claims. To combat greenwashing, regulators have begun to introduce proposals to protect consumers and investors. In August 2022, US Security Exchange Commission (SEC) launched the Climate and ESG Task Force in order to fight misleading ESG disclosures. In October 2022, UK’s Financial Conduct Authority (FCA) proposed a package of new measures including restrictions on use of terms like ‘ESG’, ‘green’ or ‘sustainable’, to protect consumers and improve trust in relevant investment products. In December 2022, China announced plans to further regulate funds claiming to be environmentally friendly. Most recently, in March 2023, the European Commission adopted a proposal for a Directive on Green Claims to ensure consumers receive reliable, comparable and verifiable environmental information on products and warned that companies making unsubstantiated environmental claims about their products could face penalties amounting to at least 4% of their total annual turnover.

What can accountants do?

Chartered Accountants, as trusted advisors, play a key role in making sure their clients and business partners can spot, avoid and act on greenwashing.
Work is ongoing in creating global sustainability standards, but accountants can still make a valuable contribution to existing reports by making sure that company financial information and sustainability-related disclosures ‘balance’ and that there is consistency between information reported in management commentary and the financial statements.

Accountants can ensure that the company is clear about what it is currently doing, that its environmental statements are accurate, and that the company is transparent about what it has achieved to date and what it is likely to achieve in the future. This can involve reviewing corporate pledges such as ‘Net Zero by 2050’ against planned investments in emissions-reduction in the company’s facilities and projects, and screening for emissions-heavy products in a company’s investment portfolio. It could also involve ensuring alignment between activities and financial reporting, in line with upcoming regulation.

When making procurement decisions, accountants have the skills of professional scepticism, rigorous attention to detail and an ability to interrogate data to separate fact from aspiration. The following are questions accountants can ask of their suppliers’ products and services:

• Does the company making the product or providing the service back up its environmentally friendly claims? Is this documented in financial statements?
• Are the claims independently certified by a verified third-party, such as SBTi, B-Corp or Fair Trade?
• Does the product use language that is vague and unspecific (for example, ‘eco-friendly’) without any description of how this is achieved?
• Are the claims made by a company too good to be true (for example, ‘carbon-neutral coal’)?

Accountants can also increase their knowledge about the meaning of terminology such as ‘carbon neutral’, ‘climate-friendly’ and ‘nature positive’. By increasing their knowledge they can use it to critically assess claims made by companies that are not backed up by quality, third-party independent verification. Accountants can look to their professional associations and international organisations and here at Chartered Accountants Worldwide for further guidance.