Airing the dirty laundry

Like any fraudulent practice, greenwashing is a serious problem. It deteriorates trust in the market, which undermines the entire ESG agenda. That said, I’d argue that seeing more headlines on greenwashing is not all bad. While it is distressing to hear just how many cases of greenwashing exist, this steady news flow means that cases of greenwashing are increasingly being exposed – and as we see from this month’s examples, they are not being tolerated.

A recent study found that roughly 68% of US CEOs admit to deliberate greenwashing. At the same time, a similar percentage of US companies report that they’ve put in place a dedicated budget for sustainability reporting. Taken together, potentially a rather distressing picture. Are businesses actively investing in delivering false narratives? Could be, especially if you take a look at this past month, during which we’ve seen several cases of greenwashing being exposed.

Australian pension fund?Mercer?Superannuation Australia Ltd has been slapped with a multimillion-dollar fine for including investments in its "Sustainable Plus" investment option that it had explicitly committed to exclude.

Wells Fargo is facing a lawsuit after attempting to “DEI (diversity, equity and inclusion)-wash” the market regarding its recruitment practices.

Asset managers like Blackrock and Vanguard are facing growing scrutiny? with respect to investment decisions that can be argued to run counter to their public sustainability commitments.

Closer to home, Total Energies was found guilty of greenwashing for claiming to be a proponent of sustainable development while continuing to operate in an environmentally unsustainable manner. ?

Arguably, greenwashing also plays a part in the recent exodus of investors from Climate Action 100+, the investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take appropriate actions on climate change.

For investors, abandoning these kinds of public commitments can make sense in the face of increasing politicisation of ESG integration (‘greenhushing’). It is also wise to do if you’re concerned that your claims might not be 100% aligned to your actions (especially given the growing understanding of what effective stewardship really looks like).?

The Science-Based Targets Initiative’s most recent position on the use of carbon credits could also be argued to have been designed to prevent greenwashing by organisations claiming to take climate action seriously (for an example of the possible ramifications see the Shell Upstream Emissions Reduction credits scandal).?

While the practice of greenwashing and the risks associated with it are sector agnostic, there is particularly significant pressure on banks, which are especially vulnerable given their tendency to commit to quite lofty sustainability targets in the context of tightening regulation in the sector. I’d propose these institutions pay particular attention to this issue.

Increasingly holding organisations to account for greenwashing presents an opportunity to develop higher quality “green” products, like we see in the case of ESG-labelled bonds and can reasonably expect in the case of increasingly regulated ESG ratings.

Looking ahead, we can expect to see many more cases of greenwashing being brought to light, as litigation and activist pressures continue to grow, regulation becomes increasingly robust and standard setters continue to go out of their way to support the market in effectively using new frameworks for disclosure.

Given the rate at which the comeuppance is being delivered, it’s in the best interest of every investor, issuer, policymaker, marketer and consumer to take the time to apply a critical eye to claims made about sustainability, ensuring not only that you won’t be a victim, but also that you won’t be found to be a perpetrator of greenwashing.

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If you’re interested in finding out more about how Krutham can support your organisation in its mission to avoid greenwashing, click here.