Greenwashing in the ESG era — an emerging corporate reputation risk
Business leaders are personally going to face immense scrutiny of their actions in the years to come especially about when and how they implement their Environmental Social & Governance (ESG) agenda. Failing to do so will not only result in a reputation damage but, will also threaten the company’s “license to operate” in the marketplace. The global momentum in favour of ESG has made it very evident that it is no longer a “feel good” factor nor it can be equated/ replaced by CSR initiatives — ESG has to be at the core of all that a business does. Increasingly informed customers are also referring to a company’s ESG promise as a criteria to assess the company’s performance and that directly influences their purchasing and recommending decisions. ESG ratings provide investors with a comprehensive and independent assessment of a company’s sustainability, including its environmental impact, labour practices, and corporate governance policies to name a few.
Using terms like “biodegradable”, “compostable”, “organic”, “natural”, “renewable”, “green”, “eco-friendly”, etc. are used as buzzwords by some brands in several instances when they are clearly not demonstrably true. For example, a large F&B company faced allegations of sourcing raw materials from areas and suppliers linked to deforestation; another F&B company’s claims of reusing plastic has been seriously questioned and so on. There is also a justified fear that many company’s ESG prescriptions can be arbitrary and are cookie-cutter practices being pushed top-down as self-appreciating claims of virtue-signalling.
Firms will face severe backlash from stakeholders if their ESG efforts are perceived to be instrumental or only profit-seeking i.e. greenwashing, which is a curse in the long-term with the potential to severely erode trust and damage reputation. The term is derived from the word “whitewash”, which means to cover up a negative with a false appearance of positivity. Commentators point that sometimes the Purpose narrative can get conflated with tall and exaggerated claims of “saving the world” and many marketers are driving down this slippery slope to mask their ESG intiatives. Similarly, critics also add that ESG is more of a means-to-market and to manage corporate image rather than any substantial on-ground action — in this case they are clearly referring to instances of greenwashing that are being passed off as genuine ESG initiatives.
Greenwashing can deliver a significant blow to a company’s reputation, sales and market cap. It can severely knock down stakeholder trust and confidence. When stakeholders realize that a company’s claims are misleading or paritally untrue, they are likely to punish the company by dumping its products or shares and also protest on social media — damaging credibility and reputation.
In many markets, greenwashing is increasingly being noticed and frowned upon by regulators and can lead to legal consequences, fines and lawsuits. The US capital markets regulator, very recently, slapped a multimillion dollar fine on a large asset management firm owing to irregularities in more than one of its ESG funds. Greenwashing regulations vary by country, but most countries have laws that prohibit false or misleading advertising & marketing claims. As of now, these anomalies are dealt by existing regulations but, very soon we may likely see exclusive bodies and institution that may monitor ESG claims and promises.
Companies that mislead will be held liable for false advertising & promotions. Greenwashers, once exposed, are bound to face negative publicity, which will further damage reputation. Negative media coverage will spread rapidly and widely, reaching masses and can be sufficient to ‘take down’ the company in no time and it may take an epoch to recover and earn back the lost equity (pun intended) and customers. Guilty companies will then face a significant challenge in their near future to establish a sustainable brand with a true sense of purpose and even undermining their genuine brand rebuilding efforts — the recent issue of a large Spanish luxury fashion house is a case in point. Not only this, such negatives also create barriers and skepticism for other companies in the sector that may be truly working to deliver on ESG and SDG Goals.
Companies that want to avoid the negative consequences of greenwashing should ensure that their environmental claims are truthful, not misleading, and based on reliable scientific evidence. Nowadays consumers are less loyal to a single brand or product and are also becoming environmentally conscious seeking the product’s backstory, which has to be credible in their eyes. Consumers are always watching out for authentic and verifiable environmental and sustainability claims and when they find instances of greenwashing, trust and support will dwindle in no time depleting brand and its communities.
ESG and greenwashing are important issues that will impact companies and consumers alike in the new paradigm of stakeholder capitalism. Companies engaging in greenwashing are not only misleading consumers but also diverting attention from real environmental issues, which is getting severe as time passes. Consumers and investors need to be well informed and be skeptical of ESG claims, and should look for credible certifications, labels and statutory information. Companies that want to enhance or even protect their reputation and build sustainable purpose brands should avoid greenwashing at all costs and focus on genuine initiatives and ensure that all communication is transparent, ethical, authentic and is two-way with all their stakeholders. ESG and stakeholder capitalism is the new paradigm and everyone is watching.
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