Risky Business: Exploring the Downfalls of Greenwashing in Corporate Reporting

As consumers, investors and governments look to align with businesses that are responsible and trustworthy, more companies are seeing the benefit of publicly sharing their sustainability goals and efforts through reporting and digital marketing.

Communicating these initiatives can separate a company from its peers and generally build its reputation. But it also comes with risks, particularly for companies that are misleading by inaccurately representing their environmental or human rights impacts – practices commonly known as greenwashing and social washing.

Whether a company is mislabelling products with eco-friendly buzzwords or improperly disclosing results in sustainability reporting, this misinformation threatens the credibility of a company (and a movement) and our collective ability to transition to a sustainable future.

How common is greenwashing?

RepRisk, an ESG data science company, recently released a report titled “On the rise: navigating the wave of greenwashing and social washing,” which explores unique, data-backed insights on the increasing prevalence of greenwashing and social washing, their integrated nature and the risks associated with these practices. RepRisk’s research found that climate change, greenhouse gas emissions and global pollution have increasingly become the subject of greenwashing in recent years, with approximately one out of five climate-related ESG incidents being linked to misleading communication in the last two years.

To get “under the hood,” we spoke with Avleen Kaur, ESG Research Lead at RepRisk, for insights into how companies can approach their activities and reporting to meet the challenges ahead and avoid the pitfalls of greenwashing and social washing.

Partners in crime: Greenwashing and social washing

One surprising fact that came out of this research is just how interconnected greenwashing and social washing truly are. According to RepRisk’s research, more than half (about 55%) of greenwashing risk incidents captured over the past five years had a social element to them, and about one in three public companies linked to greenwashing were also associated with social washing. “ESG in general is very multidimensional,” Avleen says. For example, mining projects impact local ecosystems as well as local communities. “This interconnectivity is very clear from our data, and many of these incidents cannot be neatly categorized,” Avleen notes.

What risks do greenwashing and social washing pose for companies?

Greenwashing and social washing – whether intentional or unintentional – come with significant risks for businesses, including reputational and financial impacts and even litigation. With increasingly sophisticated regulations and growing scrutiny from the public and governments, these risks are becoming harder to avoid.

Just as greenwashing and social washing are interconnected, these risks tend to be as well. Being hit with a fine or a lawsuit can have ripple effects on your company’s reputation – which can be difficult to recover from. “Reputational impact, whether that looks like reputational damage among customers, employees or investors, really leads to damage of trust,” Avleen shares.

So how can companies avoid these risks? It comes down to being authentic and transparent in messaging – even if that means sharing challenges or unmet targets. According to Avleen, keeping quiet about the progress of your ESG initiatives, a practice known as greenhushing, can be just as damaging to a company’s reputation. “I think, between those two practices, there’s a balance where companies can be more authentic and transparent, and acknowledge that this is not as easy or as rosy as it sounds. It’s a difficult journey to be on,” Avleen says.

Why is greenwashing – and social washing – on the rise?

According to RepRisk’s research, increased scrutiny could have a role to play. Since the Paris Agreement was adopted in 2015, climate initiatives have been at the centre of the ESG movement. “More companies have made climate commitments to maximize their image as a green company. And with this, there have been increased instances of these misleading environmental claims,” Avleen says. As we get closer to marking a decade since this international treaty on climate change was enacted, companies and governments are taking stock of how these commitments are playing out, and that scrutiny is unveiling instances of greenwashing.

While climate has been top of mind since 2015, social issues are increasingly entering the conversation, thanks to rising interest generally as well as new regulations, such as the Modern Slavery Act (including Canada’s Bill S-211). As seen with greenwashing, increased scrutiny is shining a spotlight on companies that are misleading the public through social washing. “I think this aligns with the direction of ESG trends. When there’s increased scrutiny and regulation focused on a specific target, such as climate or supply chains, companies may seek to protect themselves by overcommunicating their positive efforts, which sometimes results in misleading claims,” mentions Avleen.

Greenwashing in action: Who are the principal offenders?

The banking and finance industry has often been quietly labelled as a principal greenwashing offender, but it’s recently become a hot topic of conversation, with major outlets such as the CBC reporting that big Canadian banks may be making misleading claims on sustainability. But why is the finance industry susceptible to falling into the trap of greenwashing? According to RepRisk’s research, investments in oil and gas are often at the centre of these incidents, with over 50% of climate-specific incidents either mentioning fossil fuels or linking these financial institutions to an oil and gas company.

“This is something that will be called out even more with increased investor and regulator scrutiny,” Avleen says. With increased demand on the banking and finance industry to take stricter action, Avleen notes these institutions can strengthen their commitments (including net-zero portfolios), increase their transparency about the progress of those commitments and align with targets aiming for a global fossil fuel phaseout.

How can companies broaden their ESG initiatives, meet regulations and proactively avoid greenwashing and social washing?

According to Avleen, companies that want to proactively avoid these incidents need to better understand their operations and supply chains. “Today, companies can no longer claim ignorance about what is happening within their operations. They need to foster a culture of transparency, accountability and sustainable corporate practices,” she says. Once companies have a deep understanding of their own operations, they can bring in an outside perspective to enhance visibility into existing issues.

Just as financial reporting evolved into what we know today, sustainability reporting is evolving as well. Companies that demonstrate and communicate best practices now will be better positioned to deliver on requirements in the future, especially as third-party data validation gains traction and increasingly sophisticated regulations that mandate public disclosure emerge.

To prepare for this, companies need to move away from one-time promises and instead move toward ongoing goals and measurable results. “It may not be perfect, but authentic progress matters more to stakeholders than empty promises and false claims,” Avleen shares.

There are companies that are going the extra mile by embracing transparency and working to set a new standard – and those who do are seeing real benefits. Remember, when it comes to sustainability reporting, transparency and honesty are essential for companies looking to avoid the risks associated with greenwashing and social washing.

If your organization is working on materiality, targets and commitments but is struggling to effectively communicate these efforts, we are here to help. Our in-house sustainability and content experts can advise on, write, design, produce and promote your entire reporting suite. Reach out to our team today to get started.