The Problem
As per a survey conducted by PWC, 94% of the global investors surveyed believe corporate reporting contains at least some level of unsupported sustainability claims. A study by the Advertising Standards Council of India (ASCI) found that 79% of green claims made in advertisements in India were misleading or exaggerated.
Skepticism often arises when sustainability initiatives seem more promotional than substantial. This phenomenon, where companies convey a false impression or misleading information about how the company, its products and its practices are sustainable, is referred to as ‘greenwashing’. This may take various forms. Financial institutions may earmark funds as ‘ESG-focused’ but have no concrete criteria to evaluate ESG performance. Retail businesses may market products that contribute little to environment as ‘eco-friendly’ or ‘nature-friendly’. Companies in general may include unsupported claims in their annual report regarding the effectiveness and efficiency of ESG practices. Consumers and investors over the globe are weary of this.
So what?
Well, the most obvious consequence of greenwashing is legal and reputational risks. A report by the consulting firm Accenture found that only 29% of Indian consumers trust companies to tell the truth in their environmental claims. This is especially grave for financial services providers, where consumers only entrust their money to reputed organisations with high levels of integrity.
Marking its largest-ever greenwashing penalty imposed on an asset manager, the US SEC fined Deutsche Bank's subsidiary DWS US$ 19 million for misleading statements regarding its ESG investment process. The Commission found that DWS made materially misleading statements about its ESG controls and failed to implement policies to ensure accuracy.
Practices like these often lead to loss of trust and discourage investors & consumers from pursuing sustainable investments or spends. It could also lead to diversion of capital flows towards unintended non-sustainable activities.
What can we do about it?
Standards & Regulations
The lead cause for greenwashing is absence of guidelines and regulations that control communication and claims made by companies. For instance, a company may boast of its employee welfare schemes but fail to disclose the casualties caused at workplace. However, with mandatory disclosures in place, the company would have to report on all relevant matters on a ‘comply or explain’ basis.
Reporting
The introduction of the IFRS sustainability standards, the European Sustainability Reporting Standards (ESRS), Climate disclosures bills in California, Business Responsibility & Sustainability Reporting (BRSR) Framework, among others provide a structured approach to companies in different jurisdictions to report adequately on sustainability related matters. Indeed, 57% of global investors surveyed by PWC said that if companies meet upcoming regulations and standards, it will meet their information needs for decision-making to a large or very large extent.
Investments
The SEC updated its ‘Names Rule’ which addresses fund names that are likely to mislead investors about a fund’s investments and risks. As per the rule, 80% of the portfolio should align with the name of the fund. The SEBI and the European Securities and Markets Authority (ESMA) have issued a similar circular for ESG schemes and sustainable investments in India and Europe respectively. Apart from the name rules, funds are required to disclose the strategy followed to identify what constitutes a sustainable investment. Disclosures on the portfolio performance with respect to certain ESG parameters adds a layer of diligence on the investments made.
Retail
Most Consumer Protection Acts protect against greenwashing. However, there is a need for some concrete guidelines that prevent this practice.
In a recent move, the European Parliament proscribed or banned the use of generic environmental claims, e.g. “environmentally friendly”, “natural”, “biodegradable”, “climate neutral” or “eco”, without proof of recognised excellent environmental performance relevant to the claim from 2026. It also banned durability claims in terms of usage time or intensity under normal conditions, if not proven. Only sustainability labels based on approved certification schemes would be allowed from 2026.
Regulatory bodies may also initiate guidelines for making environmental claims and impose penalties for non-compliance. For instance, Australia's competition regulator, the ACCC, released guidelines across eight key principles to ensure clear, accurate, and non-misleading green claims. It has also stipulated penalties of up to AUD 50 million or 30% of the company's revenue.
Taxonomies
A taxonomy is basically a classification system that defines terms within the sustainability realm. It sets a common language and provides a clear definition of what is ‘sustainable’. This prevents companies from creating and promoting their own idea of sustainability.
For instance, the EU Taxonomy defines the criteria for economic activities that are aligned with a net zero trajectory by 2050. It plays a very important role in identifying activities and investments that can actually contribute to the net zero commitment.
On similar lines, The CFA Institute, the Global Sustainable Investment Alliance (GSIA), and Principles for Responsible Investment (PRI) have released a guideline called "Definitions for Responsible Investment Approaches" to harmonize sustainable investment terminology, including those used to classify ESG funds.
In India, the SEBI too has defined six strategies that classify ESG funds.
Third Party Assurance
The presence of independent, external eye dissuades companies from making frivolous claims. Hence, regulators around the world have mandated audits for reports, products and even certifications.
The International Ethics Standards Board for Accountants (IESBA) has released proposed ethics standards for sustainability reporting and assurance that spell out best practices for verifying a company's sustainability claims by offering detailed instructions in areas such as accounting for the impact of corporate actions on emissions, relying on outside experts, and identifying and tackling conflicts of interest.
In India too, top 150 listed companies shall be subject to mandatory reasonable assurance of BRSR Core from FY 23-24. Further, value chain partners of top 250 listed companies shall be subject to mandatory limited assurance from FY 25-26.
Climate Law Suits
Lastly, one is extra careful when one is being watched. Climate lawsuits are becoming a commonplace today, with more than 2,500 lawsuits recorded globally. And the climate litigation phenomenon shows no sign of stopping any time soon. Globally, 55% of cases have had a climate-positive ruling, according to the LSE's annual report which studied 549 lawsuits outside the US where courts had so far made a decision.
These measures may prompt companies to shift from shallow claims to real practices. We hope that companies become more vigil and adopt sustainable practices in the true sense. If you need help reporting on your sustainability practices, feel free to write to us at disha.veera@esgityadvisors.com.
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