One in four climate-related ESG risk incidents are linked to greenwashing, according to new research from RepRisk, the world’s largest ESG data science company. The study reveals an increase in the risk of greenwashing, with misleading communication and environmental footprint being key factors. Additionally, RepRisk’s data shows that nearly one in three public companies associated with greenwashing are also engaged in social washing.
Greenwashing refers to the practice of making false or exaggerated claims about a company’s environmental sustainability in order to appear more environmentally friendly than it actually is. Social washing, on the other hand, involves misleading claims about a company’s social responsibility, masking underlying social issues.
Dr Philipp Aeby, CEO and Co-Founder of RepRisk, commented on the issue, stating that the expectation of gaining a competitive advantage through a sustainable image has allowed green and social washing to persist. The lack of accountability in the corporate sustainability landscape has exacerbated this problem. However, in recent years, companies that engage in symbolic sustainability have faced criticism from the media, public, and regulators for their unfounded claims.
The study also highlights the connection between greenwashing and social washing. In fact, 55% of greenwashing risk incidents globally have a social component. The most common social washing issue in the UK and the US is human rights abuses and corporate complicity. This accounts for 26% of incidents in the UK and 25% in the US. Diversity is also a significant issue, with 18% of social washing incidents in the US linked to social discrimination or discrimination in employment, compared to 11% in the UK.
The practice of greenwashing has particularly grown in Europe and the Americas, with the banking and financial services sectors experiencing a 70% increase in climate-related greenwashing incidents in the past year. Over 50% of these incidents either mention fossil fuels or link financial institutions to oil and gas companies. Regulators are becoming increasingly aware of the scale of the problem, as demonstrated by the European Banking Authority’s utilization of RepRisk data to categorize misleading communication in the banking sector and measure its prevalence in the European Union.
Greenwashing has become more complex over time, extending beyond directly misleading consumers. It now includes pledges, certifications, and commitments, all of which contribute to obscuring the true environmental impact of companies. The lack of accountability further perpetuates greenwashing, allowing companies to benefit from setting future goals without actively addressing their environmental issues.
It is crucial for banks, asset managers, investors, and other market participants to have access to transparent data on adverse impacts. This will enable them to assess a company’s true business conduct and effectively mitigate the risk of green and social washing in their portfolios and supply chains.
RepRisk, with its expertise in researching and analyzing business conduct risks, provides a comprehensive due diligence database on ESG and business conduct risks. Its data, generated through a combination of AI, machine learning, and human intelligence, enables efficient decision-making and risk management for financial institutions and corporations.
In conclusion, the rise of greenwashing poses a significant risk to companies and investors worldwide. The increase in climate-related ESG risk incidents linked to greenwashing highlights the need for transparency and accountability in the corporate sustainability landscape. By addressing the issue of misleading communication and embracing true sustainability practices, companies can build trust with consumers, regulators, and investors, while also making a positive impact on the environment and society.
