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The rising global awareness of environmental and social issues has prompted companies to place a greater emphasis on promoting their sustainability credentials.
This has led to claims of ‘greenwashing’, where companies make false or misleading statements about their environmental credentials, whether unintentionally or as a deliberate marketing strategy.
Let’s take a closer look at greenwashing and what it means for both consumers and investors.
Why is greenwashing a hot topic?
Environmental issues are becoming a central part of corporate strategy, with the UK government committing to achieve net zero greenhouse gas emissions by 2050.
Although the UK has already reduced emissions by over 40% since 1990, substantial progress will need to be made to meet the 100% reduction by 2050.
There is also concern about the rising financial cost of climate change, with insurer Swiss Re reporting that natural catastrophes resulted in a global economic loss of over £220 billion in 2021.
It also warned that 75% of flood risks remain insured, despite floods accounting for nearly a third of natural catastrophes.
Ms Howard Boyd commented: “UK banks and insurers will end up taking on nearly £340 billion worth of climate-related losses by 2050, unless action is taken to curb rising temperatures and sea levels.”
Ms Howard Boyd also pointed to the need for more scrutiny and transparency of companies’ environmental, social and governance (ESG) practices. She warned: “Companies that believe their own greenwash are embedding liability, storing up risk for their investors.”
The government has committed to imposing a ‘green taxonomy’ on companies by the end of 2023. Like the EU green taxonomy, this will set out the criteria that activities will need to meet to be considered environmentally friendly.
Ms Howard Boyd believes that disclosure regulations will ensure the sustainability of businesses can be compared on a like-for-like basis: “This will help to benchmark best practice, set standards and celebrate the companies that really are delivering on their commitments.”
From May 2024, the FCA will also start to enforce measures aimed at tackling greenwashing amongst financial products. The new rules will require all authorised firms to ensure any sustainability claims they make are ‘fair, clear and not misleading.’
The regulator is also introducing sustainability labels, with the goal of helping investors understand what their money is being used for, based on a clear set of goals and criteria.
Clare Reilly, chief engagement officer at PensionBee, said: “The introduction of sustainable labels, as well as an anti-greenwashing rule, are key steps towards giving people more confidence that financial products making sustainability claims are actually backing up those claims with action.”
Which companies have been accused of greenwashing?
On a smaller scale, examples of greenwashing include using recycling symbols on packaging without making it clear which parts can be recycled and ‘net zero’ meat production. In addition, companies may pay for carbon offsetting, such as the planting of trees or carbon storage, without trying to reduce their underlying emissions.
On a larger scale, the US state of Massachusetts is prosecuting oil giant ExxonMobil for greenwashing in respect of the damage caused by its oil and gas products. There has been particular criticism of Exxon’s promotion of its investment in lower-emission energy solutions, while continuing to invest large sums in fossil fuel operations.
The state claims that Exxon knew about the impact of fossil fuels on climate change decades ago, but downplayed the threat. As a result, the state is claiming damages for the effect of rising sea levels and extreme weather events on the local fishing industry.
This forms part of a wider scrutiny of the oil and gas industry’s role in contributing to climate change. Four oil companies – ExxonMobil, Chevron, BP and Shell – were called before US Congress last year to discuss claims of climate disinformation.
In Europe, Volkswagen’s “Clean Diesel” advertising campaign aimed to debunk the theory that diesel emitted more airborne pollutants than unleaded petrol, and ran over a six-year period to 2015.
It later transpired that Volkswagen had rigged 11 million of its diesel cars with emission-cheating software. In reality, its diesel cars emitted 40 times the legally permitted level of nitrogen dioxide. Volkswagen paid fines of more than £26 million worldwide for its deception, including over £190 million to 90,000 drivers in England and Wales.
Greenwashing is also a problem in the domestic energy sector in the UK, due to the rise in popularity of green tariffs using renewable energy sources.
Suppliers are able to buy Renewable Energy Guarantee of Origin certificates without needing to buy the power they relate to. These certificates are combined with a mix of renewable, fossil and nuclear power bought on the wholesale market.
The end result is that suppliers can claim green credentials without actually buying any renewable energy.
What ESG reporting requirements are imposed in the UK?
In addition to the proposed green taxonomy, mandatory ESG reporting requirements are increasing in the UK.
More than 1,300 of the largest UK companies and financial institutions have been required to comply with the Task Force on Climate-Related Financial Disclosures (TCFD) regulations since April.
The level of ESG disclosure will be strengthened further with the Sustainability Disclosure Requirements (SDR) recently proposed by Rishi Sunak MP, Chancellor of the Exchequer. These will expand the scope of the TCFD regulations to cover wider sustainability topics beyond climate change.
This means that communicating ESG credentials will become even more critical to companies, not only in terms of general marketing, but also to comply with legal requirements. The proposed legislation is intended to cut down on greenwashing and the making of unsubstantiated claims.
According to PwC, ESG funds could account for over half of mutual fund assets by 2025, with 75% of institutional investors in Europe expected to stop buying non-ESG products.
