Increasing numbers of people are becoming aware of the need to reduce the harmful effects of climate change and ensure a more environmentally-friendly existence. This has led to the rising popularity of consumable products, goods and financial products that are “green’’, meaning they are not harmful to the environment.
The Climate Change Committee, the UK’s independent climate change body, has estimated that the UK will have to invest £1.4 trillion between 2020 and 2050 to reach the target of net zero – where a balance is achieved between the amount of harmful greenhouse gas emissions produced and the amount removed from the atmosphere.
With the challenge now on to create and develop a green economy, the so-called green finance is behind the funding of new, environmentally-friendly businesses and jobs. Green finance is the loans or investments that support the production of environmentally-friendly products and services and the creation of an infrastructure that is less harmful to the planet.
Banks are now more willing than ever to make money available for green initiatives such as, for example, wind and solar-powered electricity generation and cleaner transport systems. The rise in green bonds, which raise funds for new and existing projects that provide environmental benefits, has seen trading in them go above $2 trillion.
To qualify as a green bond, there has to be proof that there is genuine environmental benefit in the bond. This is one of the reasons why the UK’s financial regulator, the Financial Conduct Authority (FCA), is looking to prevent the practice of “greenwashing’’ in financial services. Other organisations are looking to tackle the use of greenwashing in the promotion of other goods and services.
What is greenwashing?
Greenwashing is the name that has been given to the attempt by some companies to give the misleading impression that their products are more environmentally friendly than they actually are.
Greenwashing was added as a word to the Concise Oxford English Dictionary in 1999. The greenwashing definition in this dictionary is: “Disinformation disseminated by an organisation so as to present an environmentally responsible public image; a public image of environmental responsibility promulgated by or for an organization, etc., but perceived as being unfounded or intentionally misleading.’’
The aim of greenwashing is to make false or exaggerated environmental marketing claims to mislead consumers, potential customers or investors, so that they spend money on the product as they believe it is not harming the environment.
To give just some examples, a firm may claim that its products are made from recycled materials, have energy-saving benefits or use less harmful chemicals or fossil fuels - even though they know that this is not true. They may even rename an existing product to create the false impression that it is an all-new, environmentally-friendly or environmentally conscious version of what they already sell.
The idea of greenwashing has existed for decades. It is thought to have been first used in 1986 by an environmentalist, Jay Westerveld. He wrote about the hotel industry falsely promoting the reuse of towels to save or help to save the environment when they were actually only trying to reduce their laundry costs.
But greenwashing has been used more and more in recent years to try and take advantage of the increasing demand for eco-friendly goods and services. This demand is caused by customers looking to buy products whose manufacture, supply chain and use do not have harmful environmental issues or environmental impact. Customers are wanting products with what is called a low carbon footprint – meaning less carbon emissions released into the atmosphere.
Examples of forms of greenwashing
Greenwashing can take a number of forms and involve various activities.
These include:
- Descriptions of a product containing false claims or vague language.
- Companies using of images of nature and buzzwords such as green, sustainable and eco-friendly that have no relation to what they are selling.
- Information about a product not being revealed, such as the full environmental cost of a product’s supply chain and manufacture.
- Companies overstating their environmental efforts.
- Firms’ fraudulent use of the process of carbon offsetting to falsely claim their production processes are not creating harmful emissions.
- Larger firms that harm the environment buying smaller companies to appeal to green-minded consumers.
- Companies promoting the green qualities of one product while saying nothing about the more damaging goods they sell.
- Making inaccurate claims about a product or its packaging being recyclable.
Greenwashing should not be confused with green marketing. Companies that have genuine green qualities are, of course, allowed to promote them in an honest, transparent way. This allows them to let people know they operate in a way that helps rather than harms society and the environment (which is known as corporate social responsibility).
Green marketing involves no attempt to deceive or confuse the customer and does not attract accusations of greenwashing from organisations such as Greenpeace. Such accusations have been made against many companies in many business sectors.
Food production, oil and other forms of energy, vehicle manufacturing, hospitality, tourism, travel and the beauty and fashion industries are among those that have had their environmental claims criticised for being greenwashing. To give one example, a 2021 study by the Changing Markets Foundation of 12 of the largest UK and European fashion brands found that 60% of the environmental claims they made were "unsubstantiated" or "misleading".
Greenwashing and the authorities
When world leaders met in 2021 for the COP26 climate summit, there was the announcement of a new International Sustainability Standards Board (ISSB). This will create rules for companies to make clear how green they are to their investors.
Regulators have recently become more aware of the need to tackle companies’ greenwashing. In 2021, the UK’s Competition and Markets Authority (CMA) announced its intention to carry out a full review of misleading green claims in 2022. It published its Green Claims Code, which emphasises the need for companies to comply with existing laws that protect consumers and not hide important environmental information.
The FCA is working on the efforts to create an international standard for companies to report how environmentally sustainable they are. It has produced principles to be followed regarding environmentally-friendly investments.
In October 2021, the UK government published “Greening Finance: A Roadmap to Sustainable Investing’’. This explains the government’s long-term aim to make the financial system greener. The United States’ Securities and Exchange Commission (SEC) has formed a task force to identify inaccurate green statements being made in the financial markets. The Swiss Financial Market Supervisory Authority has published guidance on how to prevent and tackle greenwashing when it comes to investments.
In Europe, the European Union published its Taxonomy Regulation, which came into force on 12 July 2020. This sets out conditions that have to be met for an economic activity to qualify as environmentally sustainable – a move designed to remove the potential for greenwashing.
May 2022 saw German prosecutors raid the Frankfurt offices of DWS asset management and Deutsche Bank over allegations relating to greenwashing and misleading investments (Reuters). The raids followed claims by a whistleblower that DWS had said investments it was selling were greener or more sustainable than they actually were. The chief executive of DWS resigned 24 hours later. Both Germany’s financial regulator and the US Justice Department and the Securities and Exchange Commission had been investigating DWS.
The issue of greenwashing has become increasingly important to the authorities, who are assessing what they can do to tackle it. While this is happening, companies need to be considering what they can be doing now to ensure any statements they make do not lead to accusations of greenwashing. A large part of this will involve looking closely at how they operate to find out how green they actually are.
Contact Us.
If you would like to speak to us in relation to advice about these types of matters, or you have been subject to an investigation by an agency in the UK or overseas, then please feel free to contact us via our London switchboard on +44 (0)203 947 1539, send us a message online or send an email to: enquiries@rahmanravelli.co.uk.
