Greenwashing: A Gray Area

Greenwashing: a trend on the rise, even in the financial sector. Can you still use the words ‘sustainable’ or ‘green’? KLM was recently (March 21, 2024) reprimanded for misleading advertising campaigns. So, what should you watch out for? Below, you’ll learn how to prevent greenwashing. You’ll also read about current and future proposals aimed at curbing greenwashing by lawmakers.

What is greenwashing?

Greenwashing, a term first coined by environmental activist Jay Westerveld in the late ’80s, refers to the deceptive use of environmentally friendly marketing to make consumers believe that a company operates sustainably, when in fact it does not. “Reuse your towel and save the environment” was the call from American hotel chains. But those same hotel chains did nothing in terms of waste and energy conservation. Westerveld wrote a critical article about it, introducing the term greenwashing. The hotel chains, primarily by reducing towel usage, effectively laundered their image green.

Research shows that more than 50% of environmental claims made by companies within the EU are vague, misleading, or unsubstantiated. About 40% of these claims are considered unfounded, lacking any evidence to support them. Deceptive practices range from vague and general statements about environmental benefits to overly optimistic depictions of the impact of certain measures, such as the use of Sustainable Aviation Fuels or reforestation, which offer only marginal improvements for the environment but falsely suggest sustainability.

They've already been reprimanded

Several major companies have already been accused of greenwashing. For instance, KLM was criticized for its vague and general statements about the environment that wrongly suggest that flying with KLM is sustainable, while Shell was accused of deception regarding statements about offsetting CO2 emissions by planting trees. Clothing giants like Primark, Decathlon, Zalando, and H&M have also been rebuked, among other reasons, for using vague and general terms such as ‘ecodesign’ and ‘conscious’ without further explanation of their sustainability practices.

The problem of greenwashing is not limited to companies in the consumer goods sector. Examples of greenwashing also exist in the financial sector. For example, asset manager DWS was accused of greenwashing after the head of ESG raised concerns with various authorities. DWS’s investment policy claimed to apply ESG integration, but in practice, this was hardly implemented by the responsible portfolio managers. Then there’s Rabobank, which claimed to have a zero-tolerance policy on deforestation, while in reality, it was doing business with illegal deforesters in Brazil.

What legislation is already in place?

To combat greenwashing, we currently rely on existing general legislation that prevents consumer deception. For example, we have the Unfair Commercial Practices Act (UCPA). The Authority for Consumers & Markets (ACM) supervises this legislation and in 2021 issued guidelines to assist companies in making honest sustainability claims. These guidelines include rules of thumb and examples to help companies make fair and non-misleading claims in their marketing and communication.

In the financial sector, we have Article 4:19 paragraph 2 of the Financial Supervision Act (Wft). This law stipulates that information about financial products to consumers must be correct, clear, and not misleading. The Netherlands Authority for the Financial Markets (AFM) has also established specific principles for fair sustainability claims in financial communication in the form of guidelines.

Future legislation

Despite these existing rules, combating greenwashing remains a challenge, as evidenced by the European Commission’s research. To address this challenge, various initiatives and guidelines are being developed in Europe. For instance, ESMA has drafted new guidelines that set requirements for the use of ESG- and sustainability-related terms, such as sustainable transition and impact, in the naming of investment funds. These guidelines are expected to be published in the second quarter of 2024 and will come into effect three months after their translation. New investment funds must comply from that moment on, while existing funds have a transition period of 6 months.

Furthermore, ESMA published its progress report on greenwashing in May 2023. It is currently working on a final report aimed at improving understanding of greenwashing and addressing risks associated with it. This final report, expected to be published in May 2024, will contain recommendations for regulation to effectively combat greenwashing.

Additionally, the Green Claims Directive has been proposed by the European Commission. This directive aims to ensure that environmental claims are supported by a standard method. This directive still needs to be approved by the European Parliament and the European Council. The European Commission has also proposed a Directive to strengthen consumer position for the green transition. This directive includes a ban on general environmental claims without substantiation, as well as misleading claims about greenhouse gas emission compensation. The directive also regulates the use of sustainability labels. This directive was published in early March and became effective on March 27. Member states have two years from that date to implement the rules. This will mainly be incorporated into the aforementioned UCPA. The rules will be fully applicable from September 27, 2026.

How can you apply this to your organization?

If you want to prevent greenwashing, consider the following:

  • Use correct, clear, specific, and complete sustainability claims.
  • Support sustainability claims with facts and keep them up to date.
  • Make fair comparisons with other products or competitors.
  • Understand the context from which you’re communicating.
  • Be clear about the difference between results and ambition.
  • Make future sustainability ambitions concrete and measurable.
  • Be transparent, even if you’re not where you want to be yet.
  • Ensure that visual claims and labels are helpful and not confusing.

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