ESG has evolved from niche markets to mainstream investments. The most prominent companies are promising to deliver sustainable value through goodwill and profits by being carbon neutral, culturally diverse, environmentally conscious, and more. Grandiose statements are made, seemingly reflecting courageous leadership that looks to the future. Storytelling on ESG is an important trend among the current generation of CEOs. As the face of companies, Chief Executives are now also required to be Chief Storytellers painting a colorful green narrative. To substantiate their stories, many executives claim to have put ESG at the heart of strategy.
The pressure on CEOs to hold an outwardly “green” image is mounting. Convincing shareholders and stakeholders that they perform well financially, while also showing ethical and environmental commitment, is increasingly a top priority for companies. Although there are many well-intentioned executives planning for successful ESG business integration, they also run the risk of overstating progress on green goals. The rise of corporate social responsibility, with $2.7 trillion estimated to have been invested in ESG assets in 2021 and logging growth of 53%, has been a strong incentive pushing CEOs to make grand claims. Chief Executive Officers are thus mastering the art of being Chief Storytellers.
Bold green statements need a firm foundation and planned materialization
In my last blog post, I mentioned how being green isn’t easy. Building on that thought, business leaders will need to be conscious of how to name and label products and services, and also be clear on how pledges and promises are truly perceived. No matter how heroic and exciting, bold statements need a firm foundation in order for them to hold any weight. Business must track real impact on global challenges, providing insights to the public and to investors on progress being made. Often, executives set ESG commitments far out into the future, meaning that they will be long gone from their leadership roles before pledges translate into materialized results. Prioritizing sustainability and aligning it with business success requires a concerted effort to actively prevent greenwishing that can easily turn into greenwashing.
Because there is increasing value placed on decision-making surrounding the green credentials of companies, ESG-focused institutional investment is expected to soar 84% to $33.9 trillion in 2026 that will make up 21.5% of total assets under management. Globally, businesses are eager to seize a share of this ESG investment/consumption market. Promoting their green credentials is the clear and most direct way to do so. This results in a push to adopt green language like “net-zero,” “carbon neutral,” and “sustainable”, which has seemingly led to a proliferation of unsupported or dubious green claims being made both intentionally and unintentionally.
Regulators hang greenwashing out to dry
Greenwashing is the practice of a company presenting itself as doing more to adopt sustainability than it really is, often for public relations or stakeholder buy-in reasons. Even though there is no legal definition for the term, greenwashing is widely accepted as the practice of an entity presenting false or misleading claims about its environmental sustainability. Business faces mounting pressure from investors, regulators, lawmakers, and other stakeholders to adopt ESG best practices. The growing trend has resulted in investors with $130 trillion in assets under management asking companies to disclose their climate risks. This pressure to be green has put more focus on terms, conditions, and regulations, which has led to greater incidence of greenwashing and over-promising of “green” business structures.
Greenwashing shows up in many shapes and forms, from misleading fund names to lack of real materialization or implementation of sustainability strategies to ambiguity in companies’ ESG promises and targets. The Unfair Commercial Practices Directive (UCPD) of the EU tackles misleading environmental claims and greenwashing. In force since 2005, it aims to improve consumers’ confidence and streamline business trade across borders. The UCPD Guidance publication in December 2021 confirmed that it could be applied to marketing greenwashing and that “it provides a legal basis that ensures traders do not present environmental claims that are unfair for the consumer.” The Australian Securities and Investment Commission (ASIC) has indicated an even broader view of greenwashing, including the traditional environmental concepts associated with that term as well as the ethics of a business, stating that it occurs when an entity “over represents the extent to which their practices are environmentally friendly, sustainable, or ethical.”
Wishing and washing; a thin line between wishful thinking and dirty laundry
Greenwashing is sometimes the result of conscious action, which we can be characterized as misleading, but often it is also due to lack of real knowledge, inadequate thinking through consequences, and failing to live up to promises when the complexity of execution is unforeseen. We call this unknowing or failure to deliver without prior intent “greenwishing.” Greenwishing refers to well-intended efforts that don’t materialize in the expected outcomes. Once aware, and when continued with pledges, promises and promotion with deliberate deception, this easily turns into greenwashing.
These false claims undermine the foundation of ESG investing and consumption by eroding trust and confidence in the market, thereby reducing the attractiveness of businesses engaging in real green practices. Organizations often fall into the trap of greenwishing when they have an overwhelming focus on far-off targets, data collection, disclosure, and measurement but little effort invested in detailed strategy. When nearly three out of five executives (58%) say their companies engage in “greenwashing” by exaggerating efforts to curb harm to the environment from their products, services or operations, there is a problem. Evidence suggests that customers will strongly downgrade a business or brand if that company tries to trick them with greenwashing. Take Volkswagen as a cautionary tale of catastrophic consequences, where devastating financial repercussions of the German car manufacturer’s greenwashing scandal included an estimated $27.8 billion drop in share value and $18 billion in fines for cars sold in the United States alone.
Wishing they were more “green” and being more “green” are not the same things. Thus, greenwashing and greenwishing has awakened C-suite leaders to the need for better ESG tracking and performance in a positive way. According to a 2022 Google Cloud Survey, businesses across industries see executives wanting more transparency and opportunity to overcome their top barriers; 87% agree that if business leaders can be more honest about the issues they face in terms of becoming more environmentally sustainable, they can make meaningful progress. Through their scale and influence, companies have the potential to curb greenwashing incidents and make a significant contribution toward emissions reductions and climate goals. Prominent Danish wind developer Ørsted is an example of a leader in acting on their net-zero commitment by putting it at the heart of corporate sustainability strategies and backing up claims with results – Ørsted is on track to reach net-zero by 2040, reduce scope 1 and 2 emissions intensity by 98% by 2025, and halve total value chain emissions by 2032.
Wishing and washing is counterproductive, delaying real impact
Earlier this year, Bloomberg reported that large corporations such as HSBC added “greenwashing” to the list of risks that have the potential to affect access to capital markets: “If we are perceived to mislead stakeholders on our business activities or if we fail to achieve our stated net-zero ambitions, we could face greenwashing risk resulting in significant reputational damage, impacting our revenue generating ability and potentially our access to capital.” Setting itself an ESG financing target of as much as $1 trillion by 2030, HSBC’s executives are also focused on monitoring the “physical risk” and “transition risk” tied to climate change. The bank said greenwashing is “an important emerging risk that is likely to increase over time as we look to develop capabilities and products to achieve our net-zero commitments.”
The biggest risk for businesses greenwashing and greenwishing on ESG commitments is that progress is pushed back and delayed. We need bold moves, real action, and magnified impact rather than simply “green” words. Let’s appreciate the real changemakers – those who act on greenwishing as more than a passing trend and don’t just go on greenwashing – and let’s identify the CEOs, executives, and leaders who live up to ambitious promises, do the hard work, and get things done.
Marga Hoek
Global Thought Leader and Author on Sustainable Business and Investment