Greenwashing is a challenging emerging trend in sustainable finance and business

As green finance accelerated in recent past, so did greenwashing exploiting weak regulation

Sustainable finance is becoming one of the fastest growing investment trends with $5 trillion in assets in 2021

The regulator is putting in place robust ESG disclosure standards and data measures that will reduce the greenwashing risk

Most people know what whitewashing is. For example, a government oversight agency investigates a powerful politician and writes up a damaging report or article. But then the affected politician pulls some strings, calls in some favors, and the report “gets whitewashed.” In other words, even though the investigation yielded unfavorable information, the politician can skate away clean because all the worst parts of the document were conveniently altered or deleted. A modern version of whitewashing that has emerged recently is called “greenwashing.”

This is a term tailor-made for modern times as asset management firms are under considerable pressure for promoting companies that claim to be sustainable — called Environmental, Social and Governance (ESG). Greenwashing happens when corporations spend significant resources advertising and promoting that their product or services are environmentally friendly when, in fact, they are not. In other words, greenwashing is the act of making false or misleading claims about the environmental benefits of a product, service, technology, etc. This is happening because companies have discovered that it’s more profitable to greenwash their numbers, production details, sourcing, and more to make it all look more sustainable than it really is. Once a firm says it is sustainability focused, particularly during this time where the climate agenda is on every CEO’s desk, this company becomes more attractive and thus more competitive regardless of its sustainability plans or impact. One of the most recent notorious greenwashing cases is the Volkswagen scandal where the German car producing company was promoting its low-emission carbon neutral car technology, while their vehicles were emitting up to 40 times more of the nitrogen oxide pollutants that were allowed.

Challenges ahead

Telling the difference between a proper ESG company that is implementing bona fide sustainability measures and those that are greenwashing can be extremely difficult for investors and consumers. Part of the reason for that is a regulatory system for identifying ESG factors are still being developed. Until recently, ESG disclosure requirement were based on voluntary reporting and not based on any standardized requirement, thus making it very easy for companies and asset managers to demonstrate their green credentials. Writing for Morningstar, Karen Wallace said, “There is no question that substandard regulatory disclosure requirements have made the problem worse.” The SEC (Securities and Exchange Commission) recognizes the problem and has launched some new initiatives to address greenwashing. One of those measures is the formation of a task force that identifies false statements and material gaps that make some firms less green than they claim. European nations are way ahead of the U.S. since the EU established its Sustainable Finance Disclosure Regulation (SFDR). This law will require all companies and asset management fund working within the EU to make detailed ESG disclosures ensuring that climate change mitigation, diversity and governance data is spelled out for all operations and investments.

The private sector and the think-tank community are also coming together building tools to make ESG and Sustainable claims easier to verify and to report on. One such tool is Sustainalytics, an Amsterdam-based company that uses a high-tech rating system to analyze a company ESG credentials and within few minutes provide accurate ESG scoring and performance. Sustainalytics offers free access to risk ratings for more than 4,000 companies. Tapping into this resource is one effective way to reduce greenwashing risk cost effectively.

Trend going forward

ESG is one of the hottest investment trends reaching $5 trillion dollars at the end of 2021. As this trend continues, pushed by a societal shift towards more environmentally conscious living, an increasing number of asset managers and corporations will adopt environmentally friendly practices in order to tap into this new demand for sustainable services and products. The demand for firms to go “green” will continue to cause a corresponding increase in the number of businesses that claim green credentials when, in fact, they have very little to prove.