GREENWASHING
Risks, Due Diligence, Industry Specific Issues
Greenwashing is a strategy used by companyies or organizations to give a false impression or misleadinginformation about how environmentally friendly its policies, practices, or products actually are. The term combines "green," referring to environmentally friendly practices, and "whitewashing," implying covering up or glossing over faults.
There are several potential risks for 3rd parties when a company engages in Greenwashing. Today we will look at the potential risks when there are decisions to be made around investing in a company or where there might be merger or acquisition activities.
Risks for investors
Below are some examples of the potential risks likely to be faced by investors and others from Greenwashing:
Misleading Claims: Companies may exaggerate the environmental benefits of their products or services, making them seem more eco-friendly than they truly are. For example, a product might be marketed as "green"or "natural" without substantial evidence or certification to support such claims.
Lack ofTransparency: There might be a lack of clear information or disclosure about the environmental impact of a product's lifecycle, including its manufacturing, use, and disposal. Companies might selectively disclose only positive environmental aspects while omitting significant negative impacts.
Irrelevant or Vague Statements: Some greenwashing involves making environmental claims that are vague, irrelevant, or unhelpful to consumers trying to make environmentally conscious choices. For example,claiming a product is "chemical-free" is misleading because all materials are made of chemicals, whether they are harmful or not.
Lesser of Two Evils: This tactic involves presenting a product as being "less harmful" than alternatives,without acknowledging that the product is still significantly harmful to the environment. An example might be a fossil fuel company advertising a form of fuel as "cleaner," even though it still contributes substantially to pollution and climate change.
False Labels and Certifications: Some organizations create their own certifications or labels that look similar to legitimate environmental certifications but do not hold the same stringent standards. Consumers might be misled by these seemingly official labels into believing a product is environmentally sound.
Diverting Attention: Companies might engage in greenwashing by focusing on one environmentally friendly aspect of their operation to divert attention from environmentally harmful practices elsewhere in their business.
Due Diligence Exercises
In a due diligence exercise, a potential investor or business partner should scrutinize various aspects of a company's operations, communications, and documentation to uncover any signs of greenwashing.
This process involves looking beyond surface-level claims to assess the authenticity and depth of the company's environmental commitments.
Here are key indicators and areas to examine that might suggest a company is engaged in greenwashing:
Vague or Ambiguous Claims: Look out for environmental claims that are vague, lacking in specific details, or use undefined or broad terminology like "eco-friendly" without clear, measurable standards or evidence to back up these assertions.
Lack of Third-Party Certification or Verification: Genuine environmental initiatives are often certified by reputable third-party organizations. The absence of such certifications, or reliance on self-created badges and awards, can be a red flag.
Inconsistency Between Reports and Practices: Compare the company's sustainability reports, if available, with independent audits, news reports, and NGO findings. Discrepancies between the company’s claims and external observations can indicate greenwashing.
Overemphasis on Minor Green Initiatives: Companies may highlight insignificant environmental efforts to distract from their overall environmental impact. Investigate whether their showcased initiatives are substantial or just a drop in the ocean compared to their total operations.
Lack of Transparency in Supply Chain: A company genuinely committed to sustainability will monitor and disclose information about its supply chain's environmental impact. A lack of transparency or detailed information about suppliers and sourcing practices may indicate greenwashing.
Disproportionate Marketing Spend: Analyze the proportion of investment in environmental initiatives versus marketing those initiatives. A significant disparity, with more spent on promoting green credentials than on sustainable practices, is a potential sign of greenwashing.
Historical Environmental Compliance Issues: Research the company's history regarding environmental compliance, including any violations, fines, or litigation. A history of non-compliance can suggest a pattern of disregarding environmental responsibilities.
Stakeholder Engagement: Genuine sustainability efforts often involve engaging with stakeholders, including local communities, environmental groups, and industry partners. Lack of evidence of stakeholder engagement or negative feedback from these groups can be indicative of superficial commitments.
Comparative Analysis: Compare the company’s environmental claims and practices with industry standards and competitors. Companies lagging significantly behind industry practices or making exaggerated claims compared to peers may be engaging in greenwashing.
Regulatory and Legal Scrutiny: Look for an yinstances where regulatory bodies or courts have challenged or investigated thecompany's environmental claims. Legal issues related to misleading advertising or environmental harm can be telling.
Scientific Basis and Metrics: Evaluate the scientific basis of the company’s environmental claims, including the metrics and methodologies used to calculate benefits. Lack of clear, scientifically valid metrics can be a red flag.
Commitment to Continuous Improvement: Assess whether the company has set clear, ambitious goals for future sustainability improvements and whether it tracks and reports progress against these goals.
Oil IndustryExamples
Oil companies, given their central role in the fossil fuel industry and significant impact on environmental and climate issues, have been particularly scrutinized for greenwashing practices. Here are several ways an oil company might engage in greenwashing:
Exaggerating Environmental Commitments: An oil company might make bold public statements about its commitment to renewable energy sources, such as wind or solar power, while actually investing only a tiny fraction of its budget into these initiatives compared to its investment in oil and gas exploration and extraction.
Misleading Advertising: Using advertising and public relations campaigns to highlight their involvement in environmentally friendly projects or small-scale renewable energy investments.This can create an inflated perception of the company's dedication to sustainability and environmental protection.
Carbon Offset Claims: Claiming carbon neutrality through the purchase of carbon offsets without making substantial efforts to reduce their own carbon emissions. This can sometimes involve investing in projects that have questionable or hard-to-verify impacts on carbon reduction.
Promoting Low-Carbon Products as “Green” Alternatives: Marketing lower-carbon fossil fuels, such as natural gas, as "clean" energy, despite the fact that they still contribute significantly to greenhouse gas emissions.
Green Product Names and Branding: Using green-sounding names and branding for products and initiatives that are essentially still fossil fuel-based, creating an impression of environmental friendliness.
Overselling Environmental Initiatives: Highlighting environmental conservation efforts or wildlife protection programs they sponsor, which, while potentially beneficial, do not offset the environmental and climate impacts of their core operations.
Selective Disclosure: Focusing on disclosing environmental metrics that show the company in a positive light while omitting or downplaying information about their overall greenhouse gas emissions or the environmental impact of their operations.
Sponsorship and Partnerships: Forming partnerships with environmental organizations or sponsoring green events to improve their public image, which can be seen as an attempt to "buy legitimacy" without making substantial changes to their business practices.
Lobbying Against Environmental Regulations: While publicly supporting sustainability initiatives, some oil companies may simultaneously lobby against environmental regulations or policies that would require them to significantly reduce their carbon emissions.
Investment in Renewable Energy as a Facade: Publicly investing in renewable energy projects or startups while the majority of the company's business model remains focused on fossil fuel extraction and sales. The scale of investment in renewables may be minimal compared to the overall scale of the company's fossil fuel interests.
Coal MiningExamples
Mining companies, operating in an industry often criticized for its environmental impact, including land degradation, water pollution, and greenhouse gas emissions, also engage in greenwashing practices. These practices aim to present a more environmentally responsible image to the public, investors, and regulators. Here's how a mining company might engage in greenwashing:
Overstating Reclamation Efforts: Promoting their efforts to restore mined land to its natural state after operations have ceased, while in reality, the reclamation may be minimal, ineffective, or significantly delayed.
Eco-Friendly Branding: Using greenmarketing and branding strategies to highlight minor environmental initiatives, creating an exaggerated impression of their overall environmental commitment.This could include using terms like "sustainable mining" without substantial actions to reduce the environmental footprint genuinely.
Selective Disclosure: Focusing on the positive environmental aspects of their operations, such as water recycling initiatives, while omitting or downplaying the negative impacts, like water consumption and pollution.
Highlighting Renewable Energy Use: Emphasizing the use of renewable energy sources for their operations, even if such use is a tiny fraction of their total energy consumption, which is predominantly sourced from non-renewable and polluting sources.
Misleading Environmental Impact Assessments (EIA): Producing EIAs that underestimate the potential environmental and social impacts of their projects or exaggerate the effectiveness of the mitigation measures planned.
Promoting "Green" Technologies: Announcing investment in technologies that are purported to minimize environmental impact, such as cleaner processing techniques, without clear timelines for implementation or evidence of their efficacy at scale.
Community Engagement as a Facade: Engaging in community projects or initiatives aimed at environmental conservation or sustainability, which may serve to divert attention from the more significant environmental damages caused by their core activities.
Environmental Certification Overemphasis: Acquiring environmental certifications or awards and using these to boost their environmental image, even when these certifications do not cover the full scope of their environmental impact.
Exaggerating the Recycling of Materials: Claiming to significantly contribute to recycling metals or other materials, thereby presenting mining as an essential component of the circular economy, without adequately addressing the environmental costs of extraction and processing.
Underplaying Biodiversity Impacts: Minimizing or failing to fully disclose the impact of mining operations on biodiversity, including the disruption of ecosystems, habitat destruction, and species displacement.
Misrepresenting Water Management Practices: Claiming sustainable water management practices while engaging in practices that significantly alter, consume, or pollute local water resources.
Green Product Focus: Advertising products, such as electric vehicle (EV) batteries, as essential for green technology and sustainable future, without fully addressing the environmental and social impacts of their extraction and processing.
Shipping IndustryExamples
Shipping companies, crucial players in global trade but also significant contributors to environmental pollution, including air and water pollution, engage in greenwashing to appear more environmentally friendly than they might actually be. Here's how a shipping company might engage in greenwashing:
Overstating Fuel Efficiency Improvements: Promoting minor improvements in fuel efficiency or the use of slightly less polluting fuels as major environmental breakthroughs, without substantial efforts to reduce overall emissions or invest in truly clean technologies.
Misleading Use of "Low Emission" Labels: Labeling their services as “low emission” based on selective data or comparisons, without providing a full picture of their environmental impact,especially regarding greenhouse gases like CO2 and sulfur oxides (SOx).
Highlighting Scrubber Technology: Emphasizing the installation of scrubber systems to clean exhaust gases, which may reduce sulfur emissions but can lead to significant water pollution and does not address CO2 emissions.
Promotion of LNG as a Green Fuel: Advertising the switch to liquefied natural gas (LNG) as a primary fuel source as environmentally friendly, despite LNG’s production and use still resulting in significant greenhouse gas emissions, including methane, a potent greenhouse gas.
Eco-Friendly Ship Design Overemphasis: Focusing on the design of new ships with eco-friendly features, such as improved aerodynamics or energy-efficient lighting, while the majority of their fleet operates without these improvements.
Selective Sustainability Reporting: Providing sustainability reports that highlight specific green initiatives or successes, such as wildlife conservation or waste reduction programs, without fully disclosing the company's overall environmental footprint.
Green Certifications and Partnerships: Using environmental certifications or memberships in green shipping initiatives as evidence of their environmental commitment, without significant actions to reduce emissions across their operations.
Underplaying Ballast Water and Hull Cleaning Impact: Minimizing the environmental impact of ballast water discharge and hull cleaning practices, which can introduce invasive species and pollutants into marine ecosystems.
Exaggerating Carbon Offset Purchases: Purchasing carbon offsets to claim carbon neutrality for certain shipments or services, without making significant efforts to reduce emissions directly through cleaner shipping practices.
Promoting FutureTechnological Solutions: Talking up investments in future technologies, such as hydrogen or electric propulsion, without concrete plans or timelines for implementation, giving an impression of progress toward sustainability that is not yet realized.
Speed Reductions (Slow Steaming) as a Green Initiative: Presenting speed reductions (slow steaming) as a significant environmental effort, which, while reducing fuel consumption and emissions, might not be part of a broader, more substantial strategy for environmental sustainability.
RegulatoryOversight
Regulators around the world have begun to take notice of the practice of greenwashing and have issued guidelines, regulations, and even legal actions to combat these misleading practices. The response has been especially notable in sectors where environmental claims are most prevalent, such as consumer goods, energy, and finance. Here are some examples of regulatory actions and instructions regarding greenwashing:
European Union(EU): The EU has been at the forefront of addressing greenwashing through various legislative and regulatory measures. The Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation are key components of the EU's strategy to integrate environmental, social, and governance (ESG) considerations into financial and investment decisions, aiming to prevent greenwashing in the financial sector. Additionally, the EU’s Green Deal and the Circular Economy Action Plan include measures to clamp down on greenwashing.
United States (US): The Federal Trade Commission (FTC) in the US has issued the "Green Guides" to help marketers avoid making misleading environmental claims. These guides provide clarity on terms such as "biodegradable," "recyclable," and "carbon offset," among others. The FTC has taken enforcement actions against companies making unsubstantiated green claims.
United Kingdom (UK): The UK’s Competition and Markets Authority (CMA) has been active in scrutinizing green claims, publishing guidance to protect consumers from misleading environmental claims and indicating a readiness to take action against violators. The CMA’s guidance is part of a broader effort to ensure that environmental claims do not mislead consumers.
Australia: The Australian Competition & Consumer Commission (ACCC) has also taken steps to address greenwashing. It has issued guidance and taken enforcement actions against false or misleading environmental claims. The ACCC has indicated that it is a priority area, given the rising consumer interest in sustainability.
Canada: Environment and Climate Change Canada (ECCC), along with the Competition Bureau Canada, has guidelines for environmental advertising, including the Environmental Claims: A Guide for Industry andAdvertisers. These guidelines aim to prevent greenwashing by ensuring that environmental claims are verifiable and not misleading.
InternationalStandards: There are also international standards and frameworks, such as those provided by the International Organization for Standardization (ISO), specifically ISO 14021 (environmental labels and declarations), which aim to prevent greenwashing by providing clear criteria for environmental claims.
Next Steps
Aegis deploys a standard audit methodology with a focus on ESG type issues to assist clients in understanding the risks of Greenwashing and how to identify and remediate the serisks.
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