The volume of capital flowing into companies and funds that tout their sustainability credentials has risen sharply recently. At the same time, investors, consumers, and regulators have begun to question whether companies are as “green” as they claim. Avoiding greenwashing is essential to maintaining investor confidence, meeting consumer demands, and avoiding potential regulatory scrutiny.
What is greenwashing?
Greenwashing most often occurs when there are sizeable gaps between a company’s marketing and its practices. One type of greenwashing is placing a “green,” sustainable, or eco-friendly label on a product that does not deserve the designation.
Companies accused of greenwashing often present unaudited information, vague targets, or unproven environmental claims. They announce public sustainability goals without any hard commitments. They make selective disclosures that hide negative carbon emissions data while highlighting a narrow set of positive sustainable attributes. They may also be accused of focusing their time and money in areas that don't actually address the impact of their operations.
Greater risks as scrutiny increases
Companies that position themselves as “sustainable” have profited from a growing climate-conscious group of consumers and investors. However, Cartica warns companies that while greenwashing may be marginally beneficial in the short term, it presents risks in the longer term.
Consumers, climate watchdog groups, and NGOs have become vigilant about criticizing businesses that engage in this practice. Investors are also alarmed by rising greenwashing. In a Schroders Institutional Study, roughly 60 percent of investors cited greenwashing as their top concern when integrating ESG into investment decisions. Efforts are also underway by regulators in the EU, Japan, Taiwan, and the United States to set out rules to discourage the practice of greenwashing.
10 ways to avoid greenwashing
1. Be comprehensive – Companies often make green pledges without a specific action plan. Cartica believes it is crucial for companies to disclose their existing climate impacts, their specific and time-bound goals for improvement, and the practices and policies needed to accomplish their objectives.
2. Tie sustainability goals to business goals – We believe companies should focus sustainability efforts where there is likely to be impact on business value. Companies that derive value from sustainability initiatives are more likely to invest in them, to measure whether they’re working, and to improve them over time.
3. Focus on substance before style – Savvy investors have learned to look beyond colorful sustainability reports. Companies should present the substance of their climate impacts clearly, with a focus on highlighting key risks, opportunities, and improvement in managing material issues over time.
4. Assign sustainability leadership – Cartica recommends that companies provide a clear view of who is ultimately responsible for verifying sustainability claims. This could be a Board committee, the CEO, CFO, head of IR, or a subject-matter expert.
5. Use sustainability reporting frameworks – Cartica recommends companies align reporting with TCFD, GRI, or industry-specific frameworks, which allows for peer comparison using standardized metrics.
6. Set realistic targets – We encourage companies to be bold with their sustainability targets, but also to be realistic about the resources needed to achieve them.
7. Avoid making unqualified claims – "Green” proclamations should be supported by easily accessible evidence that is verifiable or externally audited.
8. Pursue green certifications – There are a number of industry-specific organizations that verify sustainable credentials. Going through the process of certification validates sustainability claims and can make customers and investors more comfortable with your products.
9. Be candid about areas to improve – Cartica knows that comprehensive sustainability reporting is a laborious process, and no company is perfect. Companies should communicate where they believe they can improve their sustainability efforts in the initial stages of planning and reporting.
10. Don’t be afraid to hire help – Sustainability reporting can be very technical and specialized. An expert consultant well-versed in developing sustainability strategies can be helpful for companies just getting started.
.png?upscale=true&width=150&upscale=true&name=CAC_logo_trans%20(002).png){kind=logo}
