Greenwashing: who loses out among consumers and companies?

Insights 12 January 2024

Greenwashing, a term that has gained prominence in recent years, stands for a deceptive practice that can be adopted by some organizations to present themselves as environmentally responsible, despite adopting unclear practices, often contrary to the concept of sustainability. Coined in 1986 by American environmentalist Jay Westerveld, the notion was used to criticize the approach of certain hotel chains. Exploiting the environmental impact associated with laundry, these establishments encouraged guests to limit towel usage, a request primarily motivated by economic considerations. The etymology of the term stems from the combination of the words “green” (representing environmentalism) and “whitewashing” (covering up or hiding the truth).

Greenwashing is a widely spread phenomenon, particularly evident in a period like the present, where eco-sustainability has gained significant popularity. Many companies embrace the concepts of environmental and ethical sustainability, even though they may not take concrete actions to protect the environment.

This phenomenon is particularly insidious as it aims to confuse consumers by capitalizing on their growing interest in sustainable practices. Exploiting eco-sustainability as a deceptive promotional message, companies resorting to such practices seek to gain mainly financial benefits. Greenwashing poses a threat to both the environment and consumers, distorting the perception of genuine commitment to sustainability. Even companies genuinely committed to ecological practices risk compromising their credibility due to those who exploit the green trend for purely commercial purposes.

Revealing the sins of greenwashing: what do we need to know to avoid risks

In a study by TerraChoice Environmental Marketing Inc., the seven sins of greenwashing have been identified to protect consumers from misleading practices. Here is the list:

  • Sin of the hidden trade-off: declaring the eco-sustainability of a product based only on certain features, diverting attention from what has a greater environmental impact
  • Sin of no proof: a sustainability statement lacking easily accessible data or a reliable third-party certification
  • Sin of vagueness: product indications so generic that their meaning can be misunderstood by consumers
  • Sin of false labels: inserting false labels or presenting a product with counterfeit words or certifications
  • Sin of irrelevance: including truthful but unimportant or unhelpful sustainability statements for consumers
  • Sin of the lesser of two evils: an indication that may be true for a specific product category but which risks distracting the consumer from the larger environmental effects of the category as a whole
  • Sin of fibbing: sustainability statements that are simply false.

The negative implications of greenwashing practices extend across various fronts. Firstly, there is the risk of damaging corporate reputation and undermining consumer trust, as highlighted by numerous studies. Subsequently, ambiguous claims can trigger investigations by relevant authorities, escalating associated dangers. The risk of legal action represents an additional aspect, with potential significant financial losses and the looming threat of negative media exposure. Understanding these hazards is crucial for businesses to preserve transparency, reputation, and reliability in the growingly critical landscape of sustainable practices.

In a scenario where sustainability is increasingly in the spotlight, recognizing and avoiding greenwashing becomes essential. The second part of this article will explore the new proposed rules at the European level that will support companies and financial institutions looking to embrace sustainability.

Challenging greenwashing: the EU’s Green Claim Directive

In light of the recent developments regarding combatting greenwashing, the proposed EU Green Claims Directive emerges as a crucial regulatory step. Disclosed on March 22, 2023, and planned to go plenary in the European Parliament in March 2024, this directive aims to establish consistent rules for environmental claims across diverse sectors. The overarching objective is to enhance transparency and reduce deceptive practices in green marketing.

The directive addresses the need for a standardized framework by prohibiting specific greenwashing tactics and instituting clear requirements for substantiating environmental claims. It emphasizes the importance of robust and transparent scientific foundations to support these claims, signaling a paradigm shift in how businesses communicate their environmental practices.

One key aspect of the directive is its focus on consumer protection, aiming to provide more accurate and reliable information to empower consumers in making environmentally conscious choices. By improving consumer awareness of product durability and sustainability, the EU seeks to foster a marketplace where businesses are held accountable for their environmental impact.

The agreement reached on these legislative measures reflects a collective commitment to curbing greenwashing practices within the EU. The move not only aims to protect consumers from deceptive claims but also supports fair competition among businesses genuinely adopting sustainable practices.

In this evolving regulatory landscape, businesses are urged to prepare for the implementation of these directives. Adopting transparent and verifiable environmental practices not only aligns with regulatory requirements but also enhances consumer trust in the authenticity of environmental claims.

As businesses navigate this changing landscape, a proactive approach to compliance with the EU Green Claims Directive will not only meet regulatory standards but also contribute to a more transparent and trustworthy marketplace.

ESG evaluations as a strategic guide

In conclusion, a sustainable future depends on awareness and shared action, including both individuals as consumers and businesses. Indeed, this is particularly true in the financial world, from investments to supply chains, and ESG evaluations become a guiding beacon toward this common goal.

The EU Council has recently ratified its negotiating mandate regarding a proposal for a regulation on ESG ratings, aimed at enhancing investor confidence in sustainable products. These new rules, proposed by the Commission in June 2023, aim to improve the reliability and comparability of ESG ratings, promoting transparency and integrity among providers of such assessments. The Council has made some key changes to the mandate, clarifying the circumstances in which ESG ratings fall under the regulation and providing details on applicable exemptions. This agreement paves the way for interinstitutional negotiations, expected to commence in January 2024.

Consequently, the importance of reliable ESG assessments emerges as a fundamental pillar for building a sustainable future. For banks, the ability to leverage trustworthy ESG evaluations allows for discerning selection of clients and investments, reducing risks associated with deceptive methods. Trust in the sustainability practices of their users becomes essential for responsible financial management.

On the other hand, for companies, relying on ESG assessments becomes a key element to remain competitive in the business landscape without compromising their credibility. Diverging from competitors who resort to greenwashing practices solidifies the reputation and loyalty of consumers. The transparency of sustainable practices becomes a tangible advantage, promoting an ethical corporate culture and building lasting connections with stakeholders. In a world where attention to sustainability guides the choices of consumers and investors, ESG evaluations serve as a landmark, guiding the corporate path toward a prosperous growth future.