Greenwash is a rising risk – but silence is not the answer

By Ian Morris

When HSBC recently added greenwashing to its risk matrix, it signalled a growing risk for corporates the world over. They certainly won’t be the only ones to add this to their risk registers in the coming months and years.

Allegations of – and in some cases penalties for - greenwash are rife. Last summer, Unilever had a Persil advert banned for failing to substantiate the claim that it was “kinder to our planet”.  In the Autumn, Coca-Cola was named by the Ellen MacArthur Foundation as one of the worst offenders for increasing its use of virgin, non-recycled plastic, just weeks before the COP27 summit – sponsored by Coca-Cola. And now a complaint has been filed against Tesco, for supposedly false claims about its “biodegradable” teabags.

Even executive pay is potentially being greenwashed. A PWC and London Business School report last month revealed that while more than three in four of Europe’s largest 50 companies include some form of carbon target in their executive pay packages, the robustness of these targets is dubious. With an average of 86 per cent of the total available carbon target-linked bonus pots being paid out, one of the report’s authors suggested that this is inconsistent with the slow progress being made on climate change.

Rising litigation, reporting requirements and standards

ESG risks have taken a new turn amid a wave of legal challenges against those accused of greenwashing. Climate activist group Global Witness is urging the US Securities and Exchange Commission to investigate Shell PLC, saying it is misrepresenting its renewable energy investment claims. ClientEarth is taking Danone to court over plastic pollution and has filed a greenwashing law suit against airline KLM. According to the Grantham Research Institute on Climate Change and the Environment, there are over 2,000 climate change-related lawsuits in progress across the world.

These risks are only growing to grow. A recent survey of in-house lawyers by law firm Norton Rose Fulbright suggested that many in-house lawyers expect their ESG dispute exposure to increase over the coming months.

One reason for this is the heightening regulatory scrutiny. In the UK, the Competition and Markets Authority can already implement fines of up to £30m or 10 per cent of the offending company’s global turnover, whichever is higher. The Guardian recently reported that the EU is planning a crackdown on greenwashing that will see companies given 10 days to justify green claims about their products or face penalties. And in the bond market, the bloc has drawn up a set of standards to fight greenwashing that could lead to a big decrease in the number of bonds that can be labelled “sustainable”.

Another reason for the elevated risk is the introduction and development of reporting frameworks that will leave nowhere for companies to hide. In the UK, many businesses are now obliged to report in line with the Task Force on Climate-related Financial Disclosures (TCFD) and EU businesses have the Corporate Sustainability Reporting Directive (CSRD). As time goes by more organisations will be required to disclose information, and in greater detail.

The rules influencing what companies can and can’t say about “green” products and services are also set to become significantly more complex and codified. The delayed UK Green Finance Taxonomy is a common framework that will set out which investments can be defined as environmentally sustainable. The EU’s version was launched in 2020, and there are more than 30 taxonomies of this nature in development globally, which – alongside financial incentives – are key to attracting investors in low-carbon sectors. 

The upshot of these taxonomies will differ from sector to sector, but as an example, a property developer may find it increasingly difficult to claim that one of their developments is sustainable, as to legally describe it as such would require it to have achieved a range of technical criteria.

From greenwash to greenhush

Spooked by accusations of greenwash and the fear of being litigated against, some organisations have deliberately fallen silent on their environmental plans – dubbed ‘greenhushing’. The suggestion is that many businesses are doing so because they are unable to robustly back up their claims and are concerned about the scrutiny and potential legal and financial, as well as reputational, risks.

Poor data quality is often the cause of concern for sustainability professionals in this regard, and the reason for corporates to stay silent. Good quality data is a huge challenge, particularly for companies with large international supply chains trying to measure their Scope 3 emissions.

Silence is not the answer

While making spurious claims is clearly a terrible and unethical idea – and greenwashing is a very difficult reputational label to shift – remaining silent on ESG progress can also cause harm. Customers and investors want to see transparency from businesses, not the ostrich approach.

Instead, businesses must take professional advice. There are numerous excellent sustainability consultancies that can guide businesses through the technicalities of requirements such as Life Cycle Assessments and Product Sustainability Impact Assessments. In an environment with ever-more complex requirements, having good quality advice to help you establish targets and metrics, track progress and validate claims, is essential.

But compliance aside, companies need to understand that transparency about goals, practices and progress is fundamental – even if that progress is not as advanced as they would like. There is a role for communications professionals here in persuading their organisations that sometimes honesty about challenges and failures, as long as it is accompanied by genuine intent and action, is a better option than both spin and silence.

As scrutiny and taxonomies develop, HSBC won’t be the only ones to recognise that greenwash-related risk is genuine and very much on the up. But while fear of greenwash accusations is understandable, organisations must realise that silence is not the answer, and can equally pose a significant corporate risk.