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Why Greenwashing is on the Rise and What’s Being Done to Stop It: A Look at New Legislation and Initiatives

With a major UK energy supplier announcing this week that it is to end its investment in renewable energy generation of origin (REGO) certificates following concerns of misleading consumers with unrealistic claims, greenwashing is once again hitting the headlines. Greenwashing is the process of companies misreporting or exaggerating the green credentials or performance of products and services through marketing to deceive stakeholders into believing better environmental performance than is true. At a time where an awareness of ESG behaviours is now mainstream, incidents and reports of greenwashing is becoming increasingly common; a recent European Commission study found that 53% of green claims made by companies give ‘vague, misleading or unfounded information’, and that 40% of claims have ‘no supporting evidence’ whatsoever. With numerous high-profile cases of greenwashing being reported in recent years, this raises the questions why is greenwashing becoming more common, and what is being done to counter this trend?

With ESG performance an increasingly influential factor in stakeholder and investor behaviours, as well as outside perceptions of a company and access to green subsidies, the need for companies to appear as environmentally responsible as possible is now a top priority for company senior management teams. However, whilst this shift in focus is undeniably a positive evolution from historical investor focuses, it has also created pressure on companies to report positive green credentials to satisfy stakeholders, resulting in higher incidents of greenwashing in an attempt to keep up with these demands.

However, more is now being done in order to target and reduce incidents of greenwashing so that consumers are able to more confidently trust the claims made by companies regarding their green claims and credentials. The UK’s Competition and Markets Authority (CMA), which was recently granted new powers to issue potentially significant fines for breaches of consumer protection, announced on 26 January 2023 that it was undertaking a review of a range of products known as ‘fast-moving consumer goods’ (FMCG). This was to analyse environmental claims made about such products to consider whether companies are complying with UK consumer protection law, and follows previous work surrounding misleading green claims, where in January 2022 it launched enforcement action against fashion brands ASOS, Boohoo and George at Asda.

Numerous new initiatives have also been proposed and introduced in recent years, ranging from guides to help businesses understand how to appropriately report green credentials, such as the CMA ‘Green Claims Code’, to newly proposed laws and legislation aimed at regulating how companies substantiate and communicate their green claims. Considering European action, the Green Claims Directive (GCD) is an example of such legislation, which ‘obliges companies to make supporting evidence available alongside a green claim’ and requires a minimum standard on how businesses can make such claims, including independent verification. The Securities and Exchange Commission has also proposed rule changes that would require registrants to include certain climate-related risks, including greenhouse gas emissions.

As the above examples demonstrate, work is now being actively undertaken to reduce incidents of greenwashing and provide more clarity and objectivity in an area where this is significantly lacking. If successfully implemented, these steps will force companies to report accurate and verifiable data and claims, thus improving transparency and trust in corporate marketing. By enforcing obligations through legislation on companies to report in a consistent and verifiable way, as well as increasing powers to regulators to issue potentially significant penalties for breaches, this should align the behaviour of corporate boards and allow focus on implementing genuine initiatives and claims which would previously been easy to state, often without providing irrefutable evidence. There is still much work to be done, but with regular reviews of company behaviour, as well as the introduction of new legislation and standards to which companies must report, this is a step in the right direction in the battle against greenwashing.

Article original source: Landmark Information Group.

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