Greenwashing - A risk requiring prudent management

Businesses operating in a competitive landscape often seek to develop and promote their products, services and brands to align with the personal values of their customers, staff and investors. But those who make claims associated with social, environmental or ethical factors need to ensure they have appropriate governance and processes in place to manage the potential risk of greenwashing.

Greenwashing describes a form of misleading and deceptive conduct involving environmental, social or ethical claims to entice the market to purchase products or services, or to attract investment. While it can result in regulatory attention and significant financial penalties, greenwashing accusations primarily impacts a business’ hard-earned reputation and social licence to operate. It can also adversely affect market integrity and erode consumer trust more broadly.

An increasingly prominent and relevant risk

There has been increased attention on greenwashing across a broad range of industries regarding Net Zero emissions commitments, carbon offsets or decarbonisation pathways– particularly in those sectors with higher carbon emissions profiles. More and more businesses are making claims regarding their future carbon footprint and these claims are likely to attract scrutiny if they are not realistic, supported by clear targets or aligned with global standards and methodologies.

In Australia, local regulators have issued guidance and announced a supervisory and enforcement focus on greenwashing risks arising in the funds management and superannuation sectors. The Australian Securities and Investments Commission are targeting ESG-related fund labels and claims regarding investment screening criteria and stewardship activities on ESG considerations. The Australian Competition and Consumer Commission is also activating with a focus on retail.

What gets in the way of good intentions?

Very few organisations set out to deceive. Yet many remain exposed to the risk of greenwashing claims. Responding appropriately to regulatory guidance is essential but not enough. Deloitte’s own trust model offers a simple but fundamental starting point. 1) Begin with the right mindset by having clear organisational purpose in respect of sustainability. 2) Ensure that organisational capabilities are capable of delivering on that purpose. 3) Make suitable promises, delivering the right products and services.

Beyond the core matter of delivering on purpose, common issues associated with sustainability credentials include the use of generic or vague language (for example, ‘environmentally-friendly’ or ‘sustainable’) to describe products, their production methods or eligibility for recycling, often with limited foundation or unclear restrictions.

Irrespective of the source or industry sector, the key considerations for business to avoid the risks of greenwashing (or the perception of greenwashing) remains the same:

• Are the claims or representations clear, unambiguous and easily understood?
• Are the claims or representations genuine, accurate and/or supported by robust planning, due diligence and governance?
• Is the language used to describe the claims or representations consistent with common understanding and any science-based or industry-standard terms and metrics/targets?
• Are any limitations or important qualifications clearly and prominently disclosed, so that the audience is properly informed?
• Could the claims or representations reasonably be interpreted in a manner other than as intended?
• Do the claims or representations consider the full value chain (e.g. suppliers, producers, distributors, consumers) associated with the product, service or brand?
• Does the disclosure comply with guidance issued by the relevant regulator?

Proactivity is required

While these considerations all appear to be common-sense and straight-forward, the reality is that the claims may involve extensive upfront and ongoing efforts to validate and will often require detailed knowledge of the subject-matter.

In addition, firms should be routinely assessing and monitoring the broad range of communications which could give rise to greenwashing claims including corporate reports or prospectus, product information, advertising materials and website content.

Prudent firms who make claims regarding their social, environmental or ethical credentials, commitments or performance should establish robust governance, processes and controls to assess and monitor their sustainability commitments. These will underpin their reputation and trust in the market and mitigate the risks of greenwashing claims.

Co-author:

Nicholas Debney, Director Climate & Sustainability