ESG INTEL
...On Greenwashing
Written by Leslie Wong and Hussein Sayani
Media, lawmakers, and consumers are increasingly using the term “greenwashing” to criticize companies and products marketed as more environmentally beneficial than they actually are. Greenwashing is being used to describe a range of embellishments from minor cases like companies that include splashy greenhouse gas (GHG) emissions reduction stories in their ESG reports while burying the fact that their overall GHG emissions increased, to major cases like presenting an investment fund as “low carbon” when it has no low carbon attributes whatsoever. So, what exactly does greenwashing mean and are there any legal ramifications for companies that engage in it?
The term greenwashing was coined by environmentalist Jay Westerveld in the mid-1980s to describe the hotel industry’s ethically dubious, but not illegal, practice of asking guests to reuse towels to cut costs under the guise of protecting the planet. The term made its first appearance as a defined and actionable offense nearly a decade later in “The Green Guide,” published the Federal Trade Commission (FTC) in 1992. The guide, which is still in use today, provides companies with guidelines for making environmental marketing claims and how to qualify those claims.
The FTC defines greenwashing as intentionally misleading consumers on environmental attributes of a product or service, e.g., committing fraud using environmental misinformation. The FTC has the authority to impose significant monetary penalties and force companies to cease deceptive practices if they are found to be greenwashing.
The frequency of misleading environmental disclosures continues to increase as investors become more environmentally conscious. Not all of these misleading disclosures are, or can be demonstrated to be, intentional or untrue and actionable by the FTC. Some of these misleading disclosures, particularly those associated with GHG emissions and reduction targets, are made in good faith by companies that are not educated in GHG management methods and the correct application of its terminology. However, the term greenwashing encompasses those types of companies, as well as companies that make misleading, fraudulent statements. This means that the same word can refer to a minor misunderstanding, a potentially criminal action, and anything in between. No wonder everyone is confused!
That being said, is it appropriate to call such a wide range of claims “greenwashing”? Probably not, because the term no longer communicates the severity of a problematic claim. Severity could be communicated by specifying whether the greenwashing was “intentional” or “unintentional,” but that does not capture the wide and subtle range of misinformation being disclosed. Severity could be communicated by specifying if the greenwashing is “FTC actionable” or “not FTC actionable” but the FTC does not have jurisdiction over those communications. We need new terminology and clear guidelines on where the line of legality sits.
Investors and other stakeholders are increasingly demanding GHG management and disclosure from the companies they do business with, dramatically expanding the number of companies engaging in the practice. In the absence of clear, mandatory standards in the form of legislation and/or regulation, it is inevitable that some companies will stretch the definitions of the voluntary ESG reporting guidelines now being used. Clarification on what constitutes as greenwashing may not be imminent, but regulation has already been proposed.
On March 21, 2022, the Securities and Exchange Commission (SEC) proposed a rule that would require all SEC-registered companies to disclose climate change-related risks and GHG inventories. Then, on May 25, 2022, the SEC proposed a rule that would require marketers of funds identified as ESG-focused to disclose information demonstrating their environmental benefits, including the GHG inventory of their investments. For one business category, this rule would clearly define legal boundaries for environmental disclosures.
The Origin of “Greenwashing”
Defining the Term
Demands for Regulation
BACK TO HOMEPAGE
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