What is greenwashing?

Environmentalist Jay Westerveld introduced the term in 1986 after he noted the irony of hotels encouraging guests to reuse towels for environmental benefits. Greenwashing has become more common in recent years as companies lean more into environmental marketing and sustainable initiatives.

Greenwashing undermines the collective effort of nations and sustainable brands working to reduce carbon emissions and address the growing threat of climate change. However, there is an ongoing effort to combat greenwashing. Exposing instances of it, making others aware of its danger and passing regulations are some of the most effective ways to deter greenwashing.

Companies use greenwashing to capitalize on the public’s demand for greater sustainability. According to an IBM study, some consumers will pay up to 70% more for sustainable products. As people grow increasingly concerned about climate change, greenwashing offers businesses a short-term solution to boost revenue, garner praise or skirt consequences for having an adverse environmental impact.

Brands might use buzzwords such as “sustainability,” “carbon footprint” and “eco-friendly” as a green marketing tactic to convince stakeholders that the organization employs sustainable practices. Companies might also market their products as green products, make recycled material claims without credible certification or use carbon offsets to lower their emission footprint without actual mitigation.

When people spot greenwashing, it can damage a company’s reputation and bottom line, especially if it makes headlines or appears on social media. Beyond the risk to a company's finances and reputation, greenwashing can be dangerous for several reasons:

• Violates trust
• Bad for business
• Enables pollution

Greenwashing erodes peoples’ trust in companies. Imagine a business is exposed for falsifying greenhouse gas (GHG) emissions across their supply chain. Beyond the initial damage to the company’s reputation, the public might believe that other organizations are lying about their sustainability efforts as well.

Businesses can face hefty fines from organizations such as the Federal Trade Commission (FTC) for distorting figures or making dishonest sustainability claims. One automotive company said its diesel cheating scandal cost the business roughly EUR 31.3 billion in fines and settlements.¹ Greenwashing can also impact employee morale, leading to less productivity, more turnover and, ultimately, more costs.

Making false green claims is bad. Polluting the Earth while operating under the guise of environmental stewardship is worse. Mitigating excessive waste is crucial, especially now as nations work together to tackle environmental issues and meet the targets set out in the Paris Agreement.

The scale of greenwashing can range from ambiguous wording around green initiatives to multi-million-dollar marketing campaigns. For instance, a company can use hidden tradeoffs to make environmental claims based on a narrow set of attributes while ignoring larger issues. Perhaps its products are made of recycled content or are compostable but production leads to excessive carbon emissions.

In recent years, greenwashing has manifested as false environmental claims, inaccurate environmental, social and governance (ESG) reporting, fraudulent renewable energy certificates and more. Other examples include:

In 2020, the Italian Competition and Marketing authority fined Italian oil company Eni EUR 5 million for false claims that its biofuel diesel had a positive environmental impact.² Eni’s Diesel+ fuel—made up of 15% hydrotreated palm oil and 85% fossil fuels—was advertised as producing less GHG emissions. Meanwhile, palm oil production has resulted in mass deforestation while palm oil itself can produce up to three times the amount of emissions.³

In 2022, Canadian regulators fined Keurig CAD 3 million for misleading claims that the company’s single-use coffee pods were recyclable. While the pods could be recycled easily in British Columbia and Quebec, the instructions for doing so outside the provinces were not sufficient for some recyclers. As a result, the pods were not accepted and ended up in the landfill.

While these examples of greenwashing are larger in scale, most instances are more ambiguous and frequent in nature. Consider retailers in the fashion industry that have adopted sustainable fashion strategies amid fast fashion scrutiny. A recent study by the United Nations (UN) found that 60% of sustainability claims by fashion brands in Europe are “unsubstantiated” or “misleading”.⁴ More often, these greenwashing tactics come under the purview of greenwashing regulations.

Since the Paris Agreement, more companies have pledged to reduce their emissions to net zero, the point in which human-caused GHG emissions are balanced by an equivalent amount removed from the atmosphere. However, further regulations have also been put forth to provide guidance on mandatory and voluntary disclosure. For instance, the International Sustainability Standards Board (ISSB) unveiled IFRS S1 and IFRS S2 to combat greenwashing and ensure that stakeholders are better informed.

While regulations span the globe, some notable legislations have emerged from:

• The European Union
• The United States
• Latin America

The Corporate Sustainability Reporting Directive (CSRD) requires businesses operating in the European Union (EU) to disclose the environmental and social impact of their business. One of the goals of the CSRD is to mitigate instances of greenwashing through credible ESG reporting and third-party certification. In January 2024, the Greenwashing Directive was also passed into law and aims to make green claims more reliable, comparable and verifiable across the EU.

The FTC regulates unfair or deceptive marketing claims while the Securities and Exchange Commission (SEC) is tasked with holding companies accountable for instances of greenwashing. In March 2024, the SEC issued new rules to standardize climate-related disclosure by public companies. Meanwhile, in the state of California, the Voluntary Carbon Market Disclosure Act is an “antigreenwashing” law that requires companies to provide disclosure around climate-related claims and voluntary carbon offsets.

The Brazilian government recently launched the Green Seal Program to certify that certain products and services meet a set of socio-environmental criteria. The hope is that the Green Seal Program will promote the growth of Brazil’s green economy, sustainable product market and move the country toward a circular economy.

Sustainable investing is when investors incorporate environmental and social factors into their traditional investment approaches. For instance, an investor might avoid mutual funds or an exchange traded fund if one of the companies operates in an industry that’s been detrimental to the environment.

Greenwashing in sustainable investing refers to companies that use greenwashing as a way to attract purpose-led investors. They might make false sustainability claims, exaggerate ESG initiatives or distract from environmental malfeasance.