Encouraging Ethical Practices- Preventing Greenwashing in ESG Reporting

Introduction

The term \'greenwashing\' refers to the practice of businesses inflating or making false claims to be environmentally friendly; with an intent to improve their public image, frequently without actually changing their real environmental policies. The phrase \"greenwashing\" was first used in the 1980s to describe the practice of businesses dishonestly portraying their goods, services, or policies as environmentally benign to win over environmentally conscious customers. The word is a combination of the terms \"green,\" which stands for environmentalism, a concept catching up like wildfire with the glaring climate change impacts that the world is witnessing. Corporates have also been accused of \"whitewashing,\" which denotes the act of obfuscating or hiding unpleasant truths.

International case studies on Greenwashing

Greenwashing is not a recent development. Corporates have been found engaging in such unethical practices, especially when ESG reporting was voluntary in nature. Due to lack of regulations and availability of standardized metrics and reporting formats in the past along with inconsistent and low-quality data inputs, the ESG reports might not show a correct representation of a company\'s ESG status (Schroders, 2017).

The world has witnessed a number of famous global companies involved in Greenwashing. A few of them are as under:

• Volkswagen: One of the biggest automakers, became embroiled in the \"Diesel gate\" affair, a major greenwashing incident. The corporation had rigged diesel engines with \"defeat devices\" to evade emissions testing, giving the cars an appearance of being greener than they actually were.
• H&M (Hennes & Mauritz): Swedish fast-fashion behemoth debuted its \"Conscious Collection\" range, which is positioned as an eco-friendly option. In 2021, the Norwegian Consumer Authority charged H&M with deceptive marketing, arguing that the company\'s sustainability statements lacked sufficient evidence and were imprecise.
• Nestlé: Accused of misleading consumers about sustainability by using deceptive marketing tactics to promote its bottled water brands, including Poland Spring.
• IKEA: Recognized for its cost-effective furniture, IKEA claimed to source its wood sustainably, claiming to use recycled or sustainable wood. Nonetheless, IKEA was reportedly sourcing timber from illicit forestry operations in Ukraine, according to a 2020 Environmental Investigation Agency (EIA) assessment.

Academic research in Greenwashing

With the prevalence of greenwashing, academic research in this field has escalated in the recent past. Some researchers have tried to find out the determinants of greenwashing tendencies with an intent to help practitioners, policymakers, and academics to improve corporate governance practices and promote sustainability efforts. Zhang (2022) investigated the determinants leading to corporates engaging in ESG greenwashing, demonstrating that financial limitations drive organizations\' decisions to engage in greenwashing. Wu (2024) explored the impact of Green Finance Pilot Zones on corporate greenwashing practices in Chinese listed companies. Factors influencing a company\'s greenwashing behaviour in the Indian context have been examined by Sensharma, et al. (2022) and Gidage, et al. (2024).

Prevalent Greenwashing practices

Greenwashing by corporates makes it difficult for regulators, consumers, and investors to distinguish between businesses that are sincerely devoted to sustainability and those who are merely capitalizing on the trend for marketing purposes. Prevalent practices include:

• Cherry-picking statistics: Companies often present only the positive environmental performance data, omitting negative information.
• Governance Spin & Cleaning with ethics: Highlighting good governance or charitable causes to draw attention away from probable grave environmental issues.
• Purchasing endorsements or investing heavily in PR campaigns: Paying for endorsements or maintaining core processes while heavily investing in marketing that highlights environmental initiatives.
• Influencing Research: Funding misleading studies that portray the company as pro-environment.
• Use of Inaccurate measurements: Using metrics that look propitious but have lesser bearing on sustainability, such as purchasing Renewable Energy Certificates (RECs).
• Use of Complicated or vague terms or Inconsistent Reporting: Using technical terms, jargon, or vague terms like \"eco-friendly\" without precise definitions.
• Misleading Certifications and Labels: Using unverified or self-created certifications and labels.
• Neglecting Supply Chain Impact: Disregarding the supply chain or engaging in double counting of carbon reductions.
• Shifting Responsibility to Consumers: Portraying environmental impact as primarily the consumer\'s responsibility.

Preventing Greenwashing in ESG disclosures - International Initiatives

A lot of effort is being put in internationally for protecting our planet. The United Nations Sustainable Development Goals (SDGs), EU taxonomy regulations (2020 onwards), Global Reporting Initiative (GRI) Standards, and ISO standards (ISO 14000 series, ISO 14064) all provide clear criteria and guidelines to ensure transparency and accountability.

The role of BRSR in preventing greenwashing

In India, The Business Responsibility and Sustainability Reporting (BRSR) Guidelines as issued by SEBI are designed to prevent corporates in India from fudging their data. BRSR encourages stakeholder engagement, stipulates mandatory and standardized reporting based on National Guidelines on Responsible Business Conduct (NGRBC), requires qualitative and quantitative disclosures on Key Performance Indicators (KPIs), encourages third-party verification, and requires setting specific quantifiable ESG targets.

RBI Initiatives

The Reserve Bank of India has taken initiatives towards encouragement of green finance/lending, including guidelines for green bonds, framework for climate risk management, integrating green finance into policy frameworks, collaborating with international organizations such as NGFS, and introducing standardized ESG ratings and assessment metrics.

Government of India (GOI) initiatives through the CCPA

The Central Consumer Protection Authority (CCPA) has issued guidelines on the \"prevention and regulation of greenwashing,\" highlighting the importance of organizations disclosing true environmental claims and facts. CCPA guidelines define greenwashing, require clear and verifiable environmental claims, protect consumer rights to accurate information, and establish increased accountability for businesses over the full life cycle of their products and services. Non-compliance may result in fines, product recalls, penalties, and legal action.

Role of the Board of Directors (BOD) in preventing greenwashing

The foundation of any effective governance is a strong board, a capable leadership group, and a well-defined accountability structure. Establishing an ESG/sustainability committee, encouraging the use of Key Performance Indicators (KPIs), providing capacity building for employees, and having ESG expertise on the Board helps reduce risk exposure and ensures ESG compliance.

Conclusion

Numerous empirical studies attest that ESG compliance goes a long way in ensuring the long-term financial performance of corporates, while greenwashing can result in financial losses, greatly harm the company\'s brand and reputation, and can even lead to company failure. Hence, having a strong and conscientious Board that encourages an organizational culture of sustainability and ethical practices is vital.