From greenwashing to genuineness

Greenwashing refers to the practice of companies misleading consumers about the environmental benefits of a product/service or presenting themselves as engaging in practices that are not as sustainable as they are. While companies may promote eco-friendly initiatives or products, greenwashing claims can be varied in that they may lack substantial backing, mislead consumers about the real environmental impact, exaggerate the benefit, use vague language without clear definition, ignore some attributes that may be less favourable or present something that implies sustainability without any substantive backing. 

Understandably, sustainability represents both an opportunity and a challenge for organisations. The physical impacts of climate change, increased supply chain pressures, evolving customer and employee demands, investor scrutiny, and evermore stringent regulation highlight the importance of having sustainable business practices.

As the EU embarks on its ambitious climate strategy, and as Member States reflect this in local energy and climate action plans, the same will be expected of the business community. A sustainability strategy should therefore seek to prioritise decarbonisation while incorporating social elements such as diversity, equity and inclusion, employee well-being, social responsibility and ethical supply chains. In doing so, organisations need to be sure, to be honest, both in what they say and what they do, avoiding the temptation of ‘greenwishing’ i.e. having overly optimistic aspirations or projections to be sustainable without the policies and actions to achieve those goals, and the tendency of ‘greenhushing’ i.e. intentionally not communicating or withholding information to avoid scrutiny or a public backlash.  

At the core of this framework are interconnected components crucial for ESG compliance and managing greenwashing risks. The foundation is a company’s ESG strategy, which sets goals based on its specific ESG ambitions. Maintaining honest ESG communication and engaging actively with stakeholders is essential for preserving a good reputation. External assurance, whether mandated by regulations like the Corporate Sustainability Reporting Directive or obtained voluntarily, helps validate sustainability claims, ensuring the company’s actions are credible.

The framework highlights the importance of regulatory obligations and voluntary commitments in defining a company’s ESG policies, actions, and reporting. Integrating ESG risks into the company’s risk management processes is fundamental, particularly when evaluating potential greenwashing events.

A key aspect of the framework is the differentiation between internal and client-oriented processes. Internal processes focus on fostering a compliance culture, managing data diligently, and establishing strong governance to prevent greenwashing. This involves setting appropriate incentives, conducting thorough data checks, and incorporating ESG risks into the company’s defence strategy. On the other hand, client-oriented processes target the financial product value chain, including development, marketing, and monitoring, which are often prone to greenwashing risks.

Transparency is important in reducing greenwashing risks, achieved through comprehensive documentation and regular consistency checks across all processes. The framework suggests an iterative implementation process with three rounds of checks. This approach helps address immediate issues, prioritise high-risk areas, and analyse the costs and benefits of relevant measures, ensuring a thorough and holistic coverage of all framework components.