Calling a halt to greenwashing

As organisations launch environmental, social and governance (ESG) initiatives and environmentally friendly products, there have been increased claims of greenwashing – exaggerated green statements that potentially mislead the public. Regulators in Asia have been tightening their rules relating to greenwashing and clamping down on companies overstating their green credentials.

Rule tightening

South Korea became the first country in the region to put in place fines for greenwashing. Asia’s fourth-largest economy has proposed legislation that would impose fines of around US$2,270 on companies that mislead the public about their environmental credentials – as deemed by the Ministry of Environment.

The Financial Services Agency (FSA) in Japan is currently investigating cases of greenwashing and has vowed to take ‘regulatory action against malicious cases’, the FSA’s director Hideki Takada told local media. Additionally, the FSA has put forward new guidelines for public funds aimed at combating greenwashing.

Elsewhere in the world, the European Union proposed in March 2023 new laws on green claims aiming to address greenwashing and protect consumers from being misled.

The Financial Conduct Authority in the UK is working towards introducing a local Green Taxonomy by late 2023, along with an ‘anti-greenwashing’ rule that would ensure sustainability-related claims made in sustainable investment products are clear, fair and not misleading.

Multiple approaches

Greenwashing can happen in many different ways. Sometimes it is as simple as using vague terms; other times it can be making claims that are not relevant or for which there is no evidence; or it can be overstating the environmental or social benefits of specific activities. Despite the multiple different approaches, the core definitions of greenwashing are generally similar.

‘Companies may be seen as greenwashing when false environmental claims are conveyed towards consumers – inadvertently or otherwise,’ says Loretta Fong, sustainability deputy leader at PwC Mainland China and Hong Kong.

More often than not, any greenwashing done by companies – particularly reputable ones – can be unintentional and stem from a lack of awareness of what greenwashing is. At other times, ‘they do not have a comprehensive overview of the company’s operations, services and products’, adds Fong.

One possible way for companies to greenwash their operations is by issuing green bonds. ‘Some companies may reap the benefits of issuing green bonds – for example, enjoying a lower cost of funding and building a better corporate image – without delivering on what they have promised,’ says a spokesperson from Hong Kong Monetary Authority (HKMA) .

In late 2022, HKMA published a research memo showing evidence that about a third of global corporate green bond issuers are reaping the benefits of issuing them without actually cutting greenhouse gas emissions.

While this might be evidence of widespread greenwashing activities, some experts suggest taking a longer-term view.

‘It is important to note that many green measures often require sustained effort before their impact can be realised,’ says Fong. ‘Improvements in environmental performance may need to be observed over a longer time horizon before deeming these issuers to have exhibited greenwashing behaviour.’

Reducing greenwashing

There is empirical support that a well-defined green bond taxonomy and stricter environmental disclosure requirements can help avoid greenwashing behaviour.

In Hong Kong, the Green and Sustainable Finance Cross-Agency Steering Group (CASG), which is co-chaired by the HKMA and Securities and Futures Commission (SFC), and includes officials from the government and relevant financial authorities, has made progress in developing Hong Kong’s green and sustainable finance ecosystem. The moves include developing taxonomies and strengthening climate-related disclosures to combat greenwashing more effectively.

A clearer and well-established taxonomy can provide clear and objective standards to measure green performance.

With that in mind, the CASG has been working to develop a green classification framework for the local market. Because taxonomies are different around the world, providing a framework can make it easier for companies to navigate the differences, says the HKMA spokesperson.

To strengthen climate-related disclosures and to align them with global standards, the CASG is making progress towards mandating climate-related disclosures be aligned with the Task Force on Climate-related Financial Disclosures (TCFD) framework by 2025.

An early commitment to adopting new standards from the International Sustainability Standards Board has also been made.

In addition, the CASG has entered into a collaboration arrangement with the Carbon Disclosure Project (CDP), an international non-profit organisation that runs the global environmental disclosure system for companies, to jointly enhance climate data availability and sustainability reporting in Hong Kong.

From the industry end, companies could also ramp up efforts to voluntarily avoid unintentional greenwashing.

PwC’s Fong suggests that it is important for companies to review any environmental claims and substantiate them with data points and third-party research.

‘This can be achieved by attaining reputable sustainability certifications and standards, such as LEED and B Corp. The independent third-party assessment included as part of the certification helps to attest to the company’s environmental impact,’ says Fong.

Companies can also conduct regular stakeholder engagement exercises to continuously gauge how customers perceive their sustainable messaging and products.

As regulators clamp down on green marketing that is inconsistent with an organisation’s sustainable endeavours, corporate leaders need to ensure that they are transparent about how green their companies really are.