What is Greenwashing? And how to spot it.

By: Julianna Eng & Mary Kate Henderson (Lookthrough Research)

Brandon Lee via Unsplash

Intro

Big Tech companies are making even bigger promises about their commitments to reduce their environmental impact. For example, in 2019 Amazon CEO Jeff Bezos made a pledge to source 100% of Amazon’s energy from renewable sources by 2030 and to become a net zero carbon emitter by 2040. While these big promises from Amazon are exciting and clearly better than a company having no climate change stance, it is important for consumers to understand the context and future steps of these plans.

Amazon emitted 44.4 million tons of carbon dioxide from their direct operations in 2018. Furthermore, this astronomical carbon footprint doesn’t even take into account the carbon footprint of Amazon’s vastly reaching supply chain. While a pledge to reduce these emissions in the future is a great step, consumers should not forget the large role that Amazon has already played in contributing to climate change. Additionally, consumers should be asking how Amazon plans to reduce the environmental impact of their supply chain. If this supply chain is not accounted for, these Amazon actors could continue to emit as much carbon as they desire, while Amazon is advertising their “climate pledge”.

On top of having a misleading pledge to begin with, NGOs like Greenpeace have looked more into Amazon’s pledge and found that there is no concrete plan that Amazon has put forward to how they will reach these goals. Pledges to fight climate change are only as significant as the actions that follow them. Big tech companies are quick to make lofty goals about their carbon footprint reduction, however they need to be held accountable in their subsequent actions by consumers.

Definition

There’s a name for this phenomenon: greenwashing. Broadly, greenwashing is the practice of making token gestures through statements, policies, or impressions about a company’s ESG factors. Serving as a facade for companies to bolster their “sustainable” initiatives, greenwashing often can confuse consumers into engaging with harmful products or companies.

Applications

Greenwashing can come in many forms, but the two most common ways are through a company’s product and/or claims about how they operate on a corporate level. These deceiving practices use sustainability claims to increase profits without actually making intentional changes to reduce environmental impact. Often times, these “changes” are surface level marketing tactics with nowhere near the impact as suggested.

Product

On the product side, greenwashing emphasizes sustainable ingredients or supply chains that are not ESG-focused in practice. Clothing brands like H&M have launched clothing lines that claim to be environmentally sustainable in their fabric and designs. However, the fact of the matter is that H&M and any other fast-fashion clothing brand will never be able to call themselves sustainable. Fast-fashion brands base their business model off selling as many pieces of clothing as possible through capitalizing on seasonal trends and lowering prices. Consumers should examine companies as a whole when trying to spot greenwashing in environmental claims for single products or product lines.

Photo by Jess on Unsplash

Corporate

Additionally, the corporate side of greenwashing is also a big issue. This type of greenwashing happens when company’s create false pretenses of environmental-consciousness within their governance or business model. The classic example of corporate greenwashing is the criticism of hotels for displaying signs that encourage the reuse of towels to ‘save the environment’. However, environmentalists claim that hotels have significantly more effective ways they could change business practices to be more sustainable and that the towel reuse is only promoted to save money on laundry. Another example would be ExxonMobil indicating they were reducing greenhouse gas emissions when they were actually increasing. Exxon will only spend about half of 1 percent of its revenue on developing clean energy while expecting to increase production of fossil fuels by 35 percent between 2018 and 2030. Greenwashing typically takes a pinhole view of one initiative without contextualizing the bigger picture, which can lead to false narratives that can confuse investors.

Specifically, greenwashing in the finance industry can harm the viability of the sustainable finance industry in the long term. If investors or firms make false claims about the impact and intentions of their investments this will cause sustainable finance to not achieve sustainable solutions and undermines the ability of sustainable finance to mitigate climate change. Investors will lose confidence in sustainable investment claims and may allocate less of their capital to sustainable finance. The loss of momentum in this sector could prevent future positive environmental outcomes through sustainable finance.

To prevent greenwashing in the finance industry, investors need to demand clear parameters for the classification of sustainable financial products. Encouraging data collection and disclosure will allow firms who are truly investing for environmental and social impact to showcase their progress and attract business. Additionally, understanding the taxonomy behind the sustainable investing industry, like ESG vs green finance, can protect investors from making decisions based on misleading information.

Conclusion

Greenwashing is important to recognize, especially for sustainable investing. According to Deloitte, the percentage of global investors that apply ESG baselines to a quarter or more of their investments rose from 48% in 2017 to 75% in 2019. But how many of those investments are truly creating positive environmental outcomes? Greenwashing as a phenomenon is becoming increasingly more prominent with the rise of ESG mandates across the world. More and more companies are finding ways to give off the impression that they’re doing good for the environment when in actuality, they are focused on their bottom line. As ESG-conscious investing becomes more popular, the importance of holistic due diligence and ability to spot greenwashing becomes more important. This phonoema is an important consideration to be aware of when looking at a company or buying their products.