Businesses have to be run with a good Level of Integrity and Accountability
By CPA Clayton Mwaka
To some people, the term greenwashing could be a new and rare term. Honestly, many folks could have known about this possibly over the last few years due to the global pressure and publicity on humanity issues such as the environment, save-the-earth programmes, triple bottom line (profit, people and planet) and the like. The majority of people know about whitewashing, which is principally a cover-up of scandalous information through biased representation. So, we have the green and white now. You never know what the next could be – possibly indigo-washing or yellow-washing. Talk about terminologies!
It is interesting, however, to know that this term was reportedly coined by Environmentalist Jay Westerveld in 1986, in a writing related to the controversy surrounding the “save the towel” movement in hotels that was simply making the hotels save laundry costs and offered nothing beyond that. So, before we go further, you have to be smart and not be fooled by communications that you see various businesses and organisations making today.
What is greenwashing?
This word is generally used to mean false or deceitful marketing or promotion of an organisation as environmentally friendly when in reality it is not. It is making false sustainability claims, through biased and exaggerated sustainability or environmental credentials – and this could be intentional or unintentional. It is green marketing gone wrong. You will agree with me that some businesses are just clueless, and could unintentionally misreport, and you do not need to crucify them anyhow without first checking the circumstances under which such misreporting occurred.
Weak laws in various global jurisdictions sometimes make organisations careless in what they do, and nobody calls them to order. Greenwashing, therefore, could be an intentional disguise when in reality there is serious environmental damage. It could be a greenwash noise to fight competition, misguided greenwash due to ineffective communication, or indeed real and scientifically strategic sustainability statements. I think we keep this greenwashing definition here, otherwise, we could step into brain-damaging complexities.
Cited examples of greenwashing and penalties
Big names have been mentioned here. Chevron’s ‘People Do’ campaigns in the 1980’s was flagged as an intentional disguise. Major global brands such as IKEA, Coca Cola, Starbucks, Volkswagen, ExxonMobil, BP, Nestlé etc. have all been culprits of greenwashing. Volkswagen was forced to pay a fine of $125m in a strong message by an Australian court in 2021. Walmart was fined $3m for misleading consumers on its use of bamboo and rayon. Now, let me sound a warning here! Smaller businesses should not rejoice that the big guys are guilty and so they (small ones) can as well commit similar sins.
Impact of greenwashing
Greenwashing has various adverse effects. When an entity misleads consumers and society in general, this could damage the business brand with potential serious backlash, reputation problems and the bottom line of return on investment. Loss of trust and possible legal action could arise, including the entity’s inability to build brand confidence in the future. Consumers and society also lose value and could lose trust in other sustainability-related claims even by genuine entities, including losing trust in regulators. They could also be exposed to health risks due to such falsehood. The human mind rarely forgets bad things. Investors lose money and could also invest in valueless projects based on wrong information. The global economy suffers adverse effects on innovation and healthy competition. The environment suffers and some of these negative impacts take ages to correct. You can see that the impact is pervasive.
How do you spot greenwashing?
Greenwashing can be spotted by identifying distractive intentions in messages and paying attention to wording, being familiar with various recognised certifications, and not taking for granted green colours or nature-based images in product messages, among others. There could also be vague, irrelevant and meaningless labels, carbon offsetting, hidden trade-offs and selective disclosures. Understanding the true beneficial ownerships of entities also matters as some culprits hide and trade under other names to avoid identification. You could also try and analyse what you are not being told.
The auditors’ role regarding greenwashing
Though auditors have over many decades largely focused on financial information, the growing focus on sustainability reporting and disclosures in terms of enterprise value or impacts – is rapidly moving towards parity with financial information. Hitherto uncommon terminologies such as ‘carbon neutral’, ‘climate-friendly’ and ‘nature positive’ are now gaining value among accounting professionals globally.
- Auditors as gatekeepers need to align integrated reporting of financial and sustainability issues into integrated assurance. With some IPO’s (such as Deliveroo – socially poor treatment of workers) failing due to ESG misreporting and other factors, there is a growing need for mandatory regulations regarding audit of sustainability reports.
- Public expectation of auditors is increasing. The external audit is one critical line of defence for both financial assurance and sustainability assurance, in addition to internal lines of defence such as internal audit, management reviews and control frameworks. Many multinationals today have elaborate ESG Minimum Control Standards (MCSs) which are enforced globally within their entities.
- There is a growing demand for mandatory sustainability assurance. Though jurisdictions differ, and it could still be some decades before compliance is forced in some global locations, the momentum is already up. The European Commission, for example, will from 2024 demand limited assurance on sustainability reports. Reporting sustainability data through means such as GRI (Global Reporting Initiative) Standards, ISSB (International Sustainability Standards Board) Standards, SEC climate regulation, European Sustainability Reporting Standards (ESRS), the TCFD (Task Force on Climate-Related Financial Disclosures) framework, are already in the works.
- Auditors also play a role in ensuring that their clients and business partners can spot, avoid and act on greenwashing. Greenwashing misleads investors and consumers, increases business risks due to contingent discovery of the realities, leads to misallocation of investments, and ultimately affects the bottom line of profit, people and the planet. Accountants should seriously interrogate data and information including sustainability-related material balances in the books that lead to investment decisions for their clients. They should confirm that sustainability-related claims are true and are independently certified.
Greenwashing is an ill in the business world and society and it is everybody’s responsibility to identify and combat it. Business at whatever level has to be run with some reasonable level of integrity and accountability, and certainly intentional greenwashing does not fit into this. Entities and individuals who have been greenwashing should change, while those planning to start greenwashing should decide not to do so. Just as we do not like fake people in our lives, we do not like fake businesses that manipulate people’s psychology.
If you are an exception to my views, I invite you to send me an email and we can discuss. Cheers!