Highlights

• Over half of US company environmental claims lack credibility and corporate leaders have admitted to greenwashing.
• Stronger regulations, heftier penalties, and improved AI can stomp out greenwashing attempts in the future.
• Companies can also try these five other strategies to combat greenwashing reliably.

One of the ever looming threats to ESG today is business greenwashing. According to a recent report from the Environmental Resources Management (ERM), roughly 53% of environmental claims made in the EU are vague at best.

In fact, 40% of those claims lack any evidence to back up their statement. However the bigger threat is in the United States right now, with 68% of corporate leaders acknowledging that they have been involved in greenwashing.

As ESG is slowly being integrated into investment decisions, a crucial step to ESG is ensuring that ESG ratings are reliable and reflect true environmental claims. As such, business greenwashing shouldn't be tolerated and the numbers presented should encompass the full and true picture so investors can make the best ethical investment decisions they can.

How Business Greenwashing Can Be Stomped Out

The good news in all of this is that ESG raters and governments already have taken steps or have the tools necessary to make improvements. From a regulatory stand point, heftier fines would be a good deterrence. With companies wanting to improve shareholder value, being forced to pay billions if not a substantial portion of company profits would be a start. The ERM report highlights Volkswagen's $25 billion penalty in 2015 as an example.

Although they still continue to commit those same infractions as they recently paid out nearly $200 million in a Canadian court in 2020.

Aside from that, ESG raters also have access to technologies such as Natural Language Processing (NLP) to assist and evaluate greenwashing through analyzing text and detecting sentiment and tones in announcements. Although AI can't address the issue fully, human involvement in scanning and looking at that information can prove to provide more scrutiny to this issue.

Business Greenwashing Prevention Strategies

But beyond that, companies can take matters into their own hands by being better communicators and having concrete plans. The World Economic Forum recommends these five strategies to ensure environmental pledges are genuine:

1. Providing net-zero targets. Our best case scenario for the planet is to reduce half of current emissions by 2030. As such, companies need to have a comprehensive and detailed plan that outlines where the company should be at in key moments. The UN suggests including targets for 2025, 2030, and 2035.
2. Have transition plans that work. Setting targets is one thing, but being transparent about transition plans makes them more believable. Not only that but updating transition plans as targets are being met and more data is provided. No one can predict complete accuracy to where a company will be in 10 years from now, let alone by 2050. Have a plan, and update it regularly.
3. Have more transparency and accountability. The tinier details like targets, pledges, and plans, are harder to find. Tucked in corporate reports and explained in business and environmental jargon, it can be challenging for people to get the full picture.
4. Renewable energy in, fossil fuels out. Halting new reserves of fossil fuels and investing more into renewable energy is a must. The transition plan should also include key targets and display incremental use of renewables.
5. Use carbon credits sparingly. While carbon credits have historically been implemented poorly, the intention is still good. Stronger regulations around the use of these credits is required if this is to work. As such, companies should be using carbon credits as a last resort until credits become better regulated.

Business greenwashing can be handled swiftly and easily as long as we are willing to put in the effort. Stronger regulations will help, but on an individual scale it's a matter of following through with our values and getting companies to follow through with theirs.

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