Greenwashing holds big risks for companies

A lot of companies are making great efforts to become more sustainable and are obviously keen to publicise the fact. ‘A minority take advantage of the proliferation of claims to spread incomplete, inaccurate or irrelevant information and falsely project a sustainable image. That's called greenwashing,’ says specialist Kurt Devooght.

Kurt Devooght is a former Professor of Macroeconomics at KU Leuven university, with a particular focus on Economics and Ethics, and Economics and Sustainability. He is still very active in the area of sustainability and responsible investing. He chairs KBC's external 'Responsible Investing' advisory board and is an independent member of the KBC Proxy Voting and Engagement Committee.

‘Greenwashing’ happens when companies present themselves or their products as being greener or more sustainable than they are in reality, by distributing incomplete, inaccurate or irrelevant information. Incomplete information means that they communicate only part of the truth, without actually lying. Being inaccurate goes a step further, entailing the spreading of false, misleading information. Producing irrelevant information means that a company presents itself as more sustainable or greener, when in fact the information relates to only a very small part of its activities or products. For example, it may talk about the packaging being made of recycled paper, without mentioning the fact that the contents can be highly polluting, contain lots of microplastics or produce large CO₂ emissions.

Of course, it’s nothing new for companies to give misleading or incomplete information about the quality of their products, or to present them in far too positive a light; that has been happening as long as packaging and advertising have existed. Companies sometimes seek out - and sometimes cross - the line of what is permissible. The particular thing about greenwashing is that the false, incomplete or irrelevant claims relate to things such as being greener, sustainability, respect for nature and the environment, preserving biodiversity, reducing CO₂ emissions or combating deforestation. They may deploy the full panoply of communication tools for this purpose: packaging, websites, sustainability reports, commercials, and so on.’

‘BP, for example, changed its name from British Petroleum to Beyond Petroleum in 2002. The underlying message was that the company was leaving petroleum behind and joining the energy transition. Along with the new name came a new logo: a sun with a green border. But BP was then certainly, and still is today, a major player in fossil fuels. The rebranding with words and images was much more subtle than simply not doing what you say you will do.

Another, more recent example is the Dutch airline KLM, which was convicted of greenwashing in the Netherlands. It had said that it was offsetting the CO2 emissions from in flights, in part through reforestation projects. That sounds good, but it doesn't work: a tree might have to grow for another 20 or 30 years before it removes the claimed volume of CO₂ from the air. Many of these carbon offsetting projects do not achieve the suggested results. In many cases, the forests are not even planted, but instead locals are paid not to cut down existing tropical forest. So while the trees remain standing, but the additional CO₂ emissions are not offset at all. Claims that these carbon offsetting projects have a huge impact and actually offset much of a company's environmental impact are often misleading.

An example of providing irrelevant information is a commitment by an airport to electrifying the buses that take people to the planes. Whilst this is a good move in itself, it diverts attention away from what is actually the crux of the matter, namely that flying itself is a highly polluting activity. Electrifying the buses has only an extremely minimal impact on the overall emissions. Similarly, claiming to be greener by putting solar panels on the airport building and thus giving the impression that flying is more sustainable is also not correct.’

‘In most countries, companies today are free to decide what they communicate, as long as they do not infringe the general laws on misleading commercial practices. All sorts of claims are made, with very little verification. Every company can create its own label. Consumers see a green symbol of a tree or a leaf, for example, and think they are buying a more sustainable product. The website labelinfo.be lists 106 sustainability labels for Belgium alone; there is an enormous proliferation. So much so that it is impossible to look up exactly what they all mean. While there are some labels that are audited by external consultants, the majority are not. So it’s quite an unregulated space; though that is about to change: a European 'Green Claims Directive' is on the way.’

‘Companies will no longer be allowed to make generic, generalising claims using words, images or graphics about the whole of a production process, product range or business. That means they won’t be able to make claims such as: we are organic, eco-friendly, environmentally friendly, climate-neutral, our products are natural, and so on, unless they hold a certificate issued by a recognised third party verifying the claim after and investigating it. It’s possible that some kind of European eco-label could eventually emerge. A second element of the Directive is that it will ban private labels made by a company itself. Thirdly, companies will no longer be allowed to use the term ‘climate- neutral’ if it only refers to the offsetting mechanisms I mentioned earlier. That will no longer be enough; the EU wants to encourage companies to do something themselves to actually reduce their emissions.

For example, there are a lot of projects aimed at stopping people cooking on open fires in Africa. Stoves are provided to residents so that they only need to use half the amount of wood for cooking. These are good, meaningful projects, but saying as a company that you are climate-neutral because you support such projects will no longer be allowed. Instead, companies will have to achieve a reduction in their own emissions. Vague claims, or claims about future achievements, will also no longer be possible. An example might be a company that announces on its website that it has an entire sustainability department and a multi-year plan, but otherwise says nothing about that plan, or its goals and outcomes. Or a company which claims that, although it is not doing so now, it will commit heavily to sustainability from 2030 onwards.’

‘The introduction of new regulations is a good thing, but is very unlikely to be enough on its own to stop greenwashing. If a company says it has reduced its CO₂ emissions by 50 per cent since 1980, that may well be true; but how do you verify that? How was it measured? And who will be willing to file a complaint and start long and expensive legal proceedings? Additional regulation will also lead to more red tape and more checks.’

'There is definitely a role for NGOs, which have often accumulated expertise about companies in a given sector, such as transportation. Universities and journalism are also very important. Independent research is crucial; it can ensure that consumers are properly informed to enable them to adapt their buying and usage behaviour. They can also punish companies that engage in greenwashing, sometimes even going as far as a consumer boycott.
I also believe in having a limited number of good labels. The bodies which issue and control these labels are key players. Ideally they should be able to work together with governments, producers and consumers. A good exam‘ple is the roundtable on more sustainable palm oil, where all stakeholders sit down together to work out how to achieve a system of practicable and verifiable certification. Another example is FSC, the Forest Stewardship Council, which certifies wood and also recycled paper. This is a good international label which aims at bringing improvement throughout the chain. Finally, banks can also have an impact, among other things through their lending policies.

More and more banks are offering interest rate discounts on loans that are used to make a production process more sustainable. Examples might include installing solar panels or electrifying the company’s vehicle fleet. Another way banks can help promote sustainability is through the responsible investment products they offer. These products invest in companies with a good track record in sustainability in a broad sense. When banks make their selection of companies to include in these responsible investment portfolios, greenwashing is obviously one of the factors they take into account. Banks are also engaging with the companies in their investment portfolios to change or improve certain sustainability issues. Companies that change insufficiently or achieve too low a sustainability score can be ejected from the portfolio.’

‘Smaller companies usually aren’t among the front runners here. Sustainability is generally not yet very high on their agenda, let alone engaging in greenwashing. Greenwashing is most common among large companies that appeal to a wide audience for whom sustainability is important. It may sound strange, but there is also a positive aspect to greenwashing. It indicates that companies are aware that sustainability is important, at least for a section of the population, and that consumers have become more conscious of it. The next step could perhaps be for the company to actually become sustainable because it sees that it works.’

‘No, we shouldn’t be too negative. A lot of sustainability claims are correct; companies today are making huge efforts to become more sustainable. A minority of companies are taking advantage of the proliferation of claims and lack of transparency to engage in greenwashing. Regulation alone won’t be able to weed out all those companies; it’s also up to consumers to stay alert and look for reliable information.’

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