What is Greenwashing and What Are the Associated Risks?

The term “greenwashing” initially originated from the environmentalist Jay Westerveld when he criticized hotels’ environmental efforts.

They promoted reusing towels instead of using a new, clean towel every day; however, Westerveld noticed how these hotels did nothing else to help the environment and realized that they were simply attempting to reduce costs and advertise their efforts as environmentally friendly. 

The term then became widespread when addressing other companies exaggerating their environmental efforts.

However, its meaning has since been extended to Environmental, Social and Governance (ESG) reporting. Simply put, greenwashing is whenever a company makes misleading, false or unproven claims about the sustainability of their business or its operations. 

One reason companies fall victim to greenwashing is because they do not understand the full extent of ESG disclosures, as these reports are expected to be thorough and high quality. Also, most companies do not have experts determining the effectiveness of their environmental efforts, causing ESG-friendly efforts to not be as impactful as they were believed to be. In addition to this, there is pressure from outside elements, such as shareholders and customers. For example, 66% of consumers reported that they would spend more on products that come from sustainable brands. Since ESG issues are becoming more relevant topics, companies are highly influenced to become—or appear—more ESG-friendly in order to increase profits. In addition, shareholders have heavily invested in ESG funds, which have boasted the valuation of companies with strong ESG financials and metrics. 

There are several consequences if companies are caught greenwashing. The first of which is a negative impact on the organization’s reputation. Consumers are unlikely to use or recommend a brand that has violated their trust in the past. As a result of losing customers and shareholders, both profits and stock price could decrease. Most importantly, greenwashing is both illegal and unethical. The US Securities and Exchange Commission (SEC) has begun to address this issue more aggressively, creating a Climate and Risk Task Force that identifies misleading and false ESG disclosures.

Recently, the Task Force investigated BNY Mellon for allegedly misleading claims about funds using ESG factors to pick stocks. BNY Mellon neither admitted nor denied the allegations, but they did agree to pay a penalty of $1.5 million. Deutsche Bank AG has also been suspected of greenwashing within DWS Group GmbH & Co. KGaA, a company they have majority ownership in. Deutsche Bank AG’s Frankfurt offices were raided by German prosecutors over accusations of inflating ESG credentials. As a result of these allegations, both Deutsche Bank AG’s and DWS’ stock prices have dropped and Asoka Woehrmann, CEO of DWS, has resigned.

Both consumers and investors have demonstrated their demand for ESG reporting, and it is likely that this demand will be further emphasized in the future. Organizations that have voluntarily reported this information ahead of legal requirements have seen benefits from both individual shareholders and other stakeholder groups. However, entities should be fully aware that accurate and complete reporting is as vital as traditional financial reporting.

Schneider Downs provides assurance and advisory services for private and public companies. For more information concerning ESG matters and their impact to your organization, please visit the Schneider Downs Our Thoughts On blog or email us at [email protected]

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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