Greenwashing: The Negative Consequence of Poor ESG Management

The long-term impact of climate change on the global economy is becoming increasingly evident to the business world. According to a 2021 report from the World Economic Forum, the global economy could lose 10% of its total economic value by 2050 due to climate change.

Shareholders are responding to these statistics and airing their concerns to organizations. A March 2023 article by NPR observed that businesses are facing more pressure from stakeholders.  As of mid-February, shareholders filed around 540 proposals asking companies to address environmental, social and corporate governance issues, according to Proxy Preview. Resolutions focused on climate change accounted for about a quarter of this year's total, with the number increasing by about 12% from the same point in 2022.

With shareholders showing an increased interest in businesses’ environmental impact, many organizations are working towards new sustainability goals. However, not every business is honest about the true impact of their sustainability projects. This strategy is known as “greenwashing” and many businesses have chosen to deploy this tactic in order to avoid being held accountable for making limited progress. This article aims to explain what greenwashing is and how it is detrimental to those organizations that do it. 

What is greenwashing? 

Greenwashing is a form of marketing or advertising spin in which green PR and green marketing are deceptively used to persuade the public that an organization's products, aims and policies are environmentally friendly. It is a form of corporate greenwashing to promote the public image of an organization as an environmentally friendly company while not actually doing anything to reduce their environmental impact.

“I think a lot of companies and company leadership believes that whether (e.g.) environmental issues are relevant or not to them, doesn't really matter. It's only about what the market requires from the company and how to satisfy it. So, if a big part of the market wants something, or wants to see something, then let's give it to them.” said Tom Bangemann, Head of Data Development & Research for SSON Research & Analytics.

Businesses being accused of greenwashing are frequently in the news. Recently, Delta airlines has received a lawsuit alleging its “carbon-neutral” claims are greenwashing. The suit alleges that Delta’s claims that it’s the first “the world’s first carbon neutral timeline” is a sham and that Delta is buying largely fabricated carbon offsets while continuing to charge a premium price to travelers who believe they're paying for environmentally friendly travel. 

What are some examples of greenwashing?

• Making broad sustainability claims without evidence. For example, a company might claim that their products are "eco-friendly" or "sustainable" without providing any specific information about how they are more environmentally friendly than other products.
• Overstating their positive environmental effects. For example, a company might claim that their products "reduce carbon emissions" by a certain percentage, when in reality, the actual reduction is much smaller.
• Hiding environmentally unsound practices. For example, a company might source their raw materials from unsustainable suppliers, but not disclose this information to consumers.
• Using vague or misleading terminology. For example, a company might use terms like "natural" or "organic" without providing any specific definition of what these terms mean. 

What are the consequences of greenwashing?

Greenwashing will become more noticeable as consumers become more skeptical and conscious of environmental dangers. While many organizations right now might view environmental projects as “nice to have” these consequences show that addressing environmental concerns is a must. The following are some negative consequences of greenwashing.

Damage to brand reputation: When consumers find out that a company is engaging in greenwashing, they may lose trust in the company and its products. This can lead to a decrease in sales and a loss of market share.

Regulatory action: In some cases, greenwashing can lead to regulatory action against companies. For example, the FTC has taken action against companies that have made false or misleading environmental claims.

Financial losses: Greenwashing can lead to financial losses for companies in a number of ways. For example, companies may have to pay fines or settlements for engaging in greenwashing. They may also lose money as a result of decreased sales or damaged brand reputation.

Loss of consumer trust: When consumers find out that a company is engaging in greenwashing, they may lose trust in the company and its products. This can make it difficult for the company to attract new customers or retain existing customers.

By greenwashing, businesses are misleading consumers and when the consumers figure out that it wasn't true, they will probably lose business, so there is a real bottom-line effect.” said Bangemann.

Loss of investor confidence: When investors find out that a company is engaging in greenwashing, they may lose confidence in the company and its management. This can lead to a decrease in the company's stock price and make it difficult for the company to raise capital.

In addition to these direct consequences, greenwashing can also have a number of indirect consequences for businesses. For example, greenwashing can make it more difficult for companies to compete with businesses that are actually committed to sustainability. It can also make it more difficult for companies to attract and retain employees who are concerned about environmental issues.

Now that we understand the negative impacts of greenwashing, the next part of this series will look at the unique position shared services and GBS maintain in ESG initiatives and how they are equipped to ensure their organization is not greenwashing environmental initiatives.