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Are you greenwashing your ESG status?

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Inadvertent greenwashing often occurs because not enough attention is paid to ensure that the messaging about a company’s products or services is as clear as it should be #whyafrica #ESG #environmentalmanagement #social #governance #community #whyafricaroadtrips

Are you greenwashing your ESG status? 

Greenwashing your ESG status could result in serious reputational damage.

By Warren Beech    

Being in business, regardless of what this business may be, is extremely challenging, and to stay in business, particularly in the post-Covid world, businesses need to have a competitive edge and they need to do things differently. Unfortunately, sometimes, businesses take advantage of, or exploit trending themes to develop this “competitive edge”.

It is not only the pursuit of a competitive edge that prompt businesses to follow trending themes. There are so many competing interests, including shareholder demands for return on investment, demands from broader stakeholders to benefit from the business, and pressure from regulatory bodies and government.

To satisfy these competing interests, business naturally want to present the best possible picture of the company’s performance, and the narrative that the company is meeting, or even exceeding, expectations on trending themes often become the key focus.

These competing interests are even more prevalent in businesses that are focused on the extractives industry (particularly where the mineral involved is regarded as “dirty” such as coal), industries that have historically been associated with exploitation of workers, businesses that may be associated with child labour and modern slavery, and sectors with poor environmental track-records.

While there have always been themes and trends that can make a business look better, such as corporate social investment and responsibility programmes, the theme that has trended for at least the last two to three years, is measurement against environment, social and governance principles (ESG) which has, in certain instances, been exploited, resulting in greenwashing.

What is greenwashing? (Are you greenwashing your ESG status?)

Greenwashing is, as the name suggests, a focus by a company on demonstrating that it is environmentally friendly. What distinguishes greenwashing from a genuine programme of environmental compliance and reputation building, is that greenwashing programmes are typically aimed at presenting the environmentally friendly narrative at the expense of actual compliance, and programmes which are genuinely focused on reducing environmental impacts through water and waste management programmes, use of alternative energy sources, making us of organic and other environmentally friendly products, elimination of harmful chemicals, and, ultimately, adopting a sustainable approach which benefits current and future generations.

Unfortunately, in the worst greenwashing cases, claims around being environmentally friendly are false, and are intended to mislead those stakeholders who make deliberate decisions to acquire goods and services from environmentally friendly suppliers, and companies.

Global demands for decarbonisation, a green economy, and the trend towards environmentally friendly products and services, create positive opportunities for businesses that are genuinely committed to being environmentally friendly but, unfortunately, at the same time, it provides an opportunity for both deliberate and inadvertent greenwashing.

Deliberate greenwashing is where a business or company intentionally presents a narrative that it is environmentally friendly, knowing this to be false, or where the business is not actually implementing environmentally friendly programmes within its business structures including in relation to its key stakeholders such as communities, in and around mines, in the case of the mining and natural resources sector.

Inadvertent greenwashing often occurs because not enough attention is given to ensuring that the messaging about a company’s products or services is as clear as it should be, allowing consumers to believe that the messaging around being environmentally friendly means more than what it actually is. There is a distinct difference between “green marketing” and “greenwashing”.

The difference between greenwashing and green marketing (Are you greenwashing your ESG status?)

Green marketing crosses over into greenwashing if messaging around environmental compliance and commitment is deliberately vague or misleading, if it is incorrect, or important information is left out.

The use of trends and themes, and buzz words, all play a role in greenwashing. ESG is the most recent, but potentially the most harmful greenwashing tool.

ESG is a critical metric, if applied properly. Unfortunately, ESG elements have been vague, interpreted differently by different role-players and implemented with the assistance of so-called specialists who may not have the appropriate knowledge, skills, and experience to ensure that ESG is meaningful and an accurate reflection of a business’s status on each of the pillars, namely environment, social and governance.

In addition to the broad ESG concept, over-reliance on buzz words have made it extremely difficult for stakeholders such as investors, customers, suppliers, and other service providers, to properly understand the status of a business’s compliance with ESG.

Buzz words such as “environmentally friendly”, “sustainable” and other similar wording, creates impressions which are not necessarily a true reflection of a company’s status.

Risks associated with greenwashing

There are significant risks associated with greenwashing, falling into two broad categories, namely reputational and enforcement.

A business’s relationship with its stakeholders is typically based on trust, and if any misrepresentation occurs, including through greenwashing, this trust relationship can be irretrievably broken leading to loss of business, and, even, in extreme cases, the closing down of the business.

Enforcement action is increasing through both the efforts of the regulators that are responsible for compliance, and increased litigation by a range of stakeholders including non-governmental organisations, environmental activists, activist shareholders and other interested parties.

There has been an increase in the so-called ESG litigation, which focuses on greenwashing claims, misrepresentation on ESG compliance, consumer protection, data privacy, false advertising, unfair competition, breaches of financial reporting requirements, and, in certain cases, directors’ liability.

The United Nations COP 26 Summit in 2021 highlighted the need to address greenwashing, and since then, there has certainly been a renewed focus on greenwashing, across the world.

Companies, their directors, and subject matter specialists (including advisors) potentially face significant litigation and claims surrounding greenwashing, and it has become even more important for businesses to dedicate appropriate resources (time, money and people) to ensuring that messaging around environmental compliance is not vague, misleading, or deliberately intended to deceive. A smoke and mirrors approach will only work for so long.

Companies that focus on genuine environmental compliance and sustainability programmes, can get ahead of the curve, and can benefit substantially from a genuine programme. Companies that wait for regulatory intervention before embarking on genuine environmentally friendly programmes, will be caught short, and may lose their competitive advantage.

The reality is that regulators across the globe, including competition commissions, advertising standards authorities, financial watchdogs, and regulators have identified that greenwashing is being used, frequently, to overstate a company’s position to present a more positive narrative.

It is also a reality that people are more educated on greenwashing than they were in the past because of the internet, social media, and other forms of instant communication, which bring messages to people on a mass basis.

In South Africa, the Johannesburg Stock Exchange released its Sustainability and Disclosure Guidance in June 2022 with the aim of assisting listed companies in relation to ESG reporting. The Sustainability and Disclosure Guidance has been shared widely, and we have found that aggrieved shareholders are making full use of the Sustainability and Disclosure Guidance to support claims.

Greenwashing creates reputational risk for businesses, personal risk for members of the board, and can result in litigation and enforcement action.

The time has come for companies to critically assess environmental compliance and sustainability programmes to ensure that they cannot be accused of greenwashing.

Warren Beech is CEO of law firm Beech Veltman Incorporated

Are you greenwashing your ESG status? 

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Are you greenwashing your ESG status?

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