Greenwashing damages consumer confidence and tarnishes a firm's reputation. With regulators clamping down, we examine how to avoid it.
A worldwide study by data agency iResearch revealed that over 50% of financial services businesses believe at least some of their competitors are deliberately greenwashing - a marketing tactic that aims to boost a company's image by giving a false impression about its environmental soundness.
Why? A significant growth in the number of investors and consumers demanding environmentally friendly products has led to organisations making vague, exaggerated or false claims to attract customers.
Regulatory bodies like the Financial Conduct Authority (FCA) are now clamping down on greenwashing by proposing new rules. These include the introduction of sustainable investment product labels and more accessible disclosure-related information.
According to the Cambridge Dictionary, greenwashing is "behaviour or activities that make people believe a company's doing more to protect the environment than it is". In 2021, a global review by the Competition and Markets Authority (CMA) found that 40% of firms' green claims could be misleading.
The term was coined in 1986 by Jay Westerveld in an essay he penned on multiculturalism. Westerveld referenced a trip to Fiji, where he saw a note at a hotel asking customers to reuse their towels to reduce ecological damage.
However, Westerveld knew the resort was rapidly expanding: new bungalows were being built with little thought for the environmental impact. They claimed to care about the planet, but their actions said otherwise. In his paper, Westerveld wrote: 'It all comes out in the greenwash.'
Following that, a literary magazine published Westerveld, and the term gained traction with the wider media. Since then, there have been many notable cases of greenwashing, with accusations levelled at high-profile corporations like the Royal Bank of Canada, Volkswagen, Ryanair and Ikea. It generally takes one of three forms:
When firms greenwash, consumers who think they're part of the solution towards a greener future are unwittingly contributing to the problem. Misleading language also undermines trust in sustainability claims as a whole and damages a company's reputation.
In terms of financial greenwashing, businesses and individuals may end up investing in assets that don't align with their ESG policy. By being misled, they inadvertently act unsustainably and against their principles. Moreover, they don't capitalise on legitimate green products.
On top of that, misinformed organisations can't accurately evaluate investment risks, potentially leading to reputational and compliance issues.
PwC calls sustainable finance "the growth opportunity of the century". However, the rise of the environmentally friendly investor has led to unintended negative consequences: an increase in greenwashing. When trying to spot greenwashing, watch out for the following:
These methods rarely hold up to scrutiny when examined in depth, or they misdirect you from the real issues. Examples of financial greenwashing include:
Indeed, HSBC recently came under fire when the Advertising Standards Authority banned a series of misleading climate-related adverts and said future campaigns must disclose their contribution to the crisis.
The main consequences of greenwashing include regulatory action in the form of fines and bans on advertising. Over and above the financial damage, greenwashing impacts consumer and investor confidence. Greenwashing severely dents a firm's reputation, which might be irreparable.
With global ESG assets set to exceed $53 trillion by 2025, it's in everyone's interest to cement the green market as robust and trusted. To achieve that, regulators around the world are taking action.
For example, in 2021, the CMA published the Greens Claims Code to help businesses stay on course and avoid misleading their customers. They outlined six guiding principles to ensure environmental claims:
Alongside adhering to the Greens Claims Code, additional steps firms should take to avoid greenwashing include:
In October 2022, the FCA proposed the following new rules to tackle greenwashing and bolster trust in ESG products:
The FCA plans to publish the final rules by the end of the first half of 2023. They'll form part of a broader ESG Strategy and Business Plan to protect consumers and improve trust in ESG-focused products and services.
In the meantime, the FCA is investigating how fund managers have responded to expectations outlined in the Dear Chair letter issued in July 2021. Focus areas range from building trust in the market through clear and fair communications to making ESG data easily available.
To comply with the FCA's package of measures, companies need a comprehensive and well-executed plan, including evaluating their products and services and familiarising themselves with proposed labels and criteria as well as disclosure types.
This will undoubtedly take time and money to implement effectively, but proactive organisations will reap the rewards by avoiding regulatory scrutiny and reputational risk while building trust.
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