"Greenwashing": Cleaning out the Green Wash Program
Sustainability, organic and socially responsible are considered attributes with which many companies now adorn themselves. But much of it is more of a deception, known as "greenwashing" in the jargon. How do I recognize greenwashing, what are the controversial examples, and why should you pay close attention to small print?
Martin Raab and Mauro Baumann
Green labels and sustainability slogans are sprouting up on grocery shelves just as they are in corporate communications. Since 2019, the most widely used additional color for printed labels on consumer goods in Europe has been red for price offers and green for healthy indications such as "organic" or "sustainably grown". Yesterday still ordinary, today already "sustainable". But it's not just the consumer goods sector that is making the shift to greater sustainability and environmental compatibility; many other industries are also big on adapting their production and distribution processes. But as benign as the motives of many companies may be, practice teaches of quite a few deceptive maneuvers up to downright fraud. The keyword is "greenwashing".
What is greenwashing?
You hear about it almost every day - but how is it defined and what is it actually? Here is our clear definition: Greenwashing is the term used to describe a company or organization that falsely claims to be more environmentally friendly than it actually is. The deception is based on statements, calculations or visualizations that are used to make customers and investors believe that environmental (and social) goals in particular are given special focus or clear priority by the company in its overall manufacturing processes.
This kind of deception is a major problem. Through falsification, we believe that by buying a product, for example, we are doing something good for the environment or contributing positively to social standards. But this may not be true at all, or even the opposite may be the case. As a result, we may pay a surcharge in good faith, even though the product is not better for the environment or people. To avoid being deceived too often, it is useful to know how companies practice greenwashing.
How do companies do it?
Sometimes greenwashing can happen completely unknowingly. A trivial but good example from the consumer goods sector are frozen French fries. These are now also advertised as "organic fries" with sustainably grown potatoes. Organic farmers smile from the packaging with green labels. As a consumer, you are reaching directly into the indirect greenwashing trap here, because between harvesting, processing and sale in the supermarket, enormous amounts of energy are expended through drying, frying and freezing. Not to mention the delivery routes of the trucks to the supermarket. Frozen products, as appetizing and tempting as they may sometimes be, simply have the worst eco-balance on supermarket shelves worldwide. A more climate-friendly alternative in the example of organic fries would be homemade rosemary organic potatoes with olive oil, which also get crispy when baked - without the frozen CO2 excess and GMO risk of conventional fries.
Mostly, though, ventures intentionally use much more sophisticated tricks to appear greener and more sustainable. Primarily, it's about putting the good stuff especially in the corporate communications spotlight and sneaking and purposefully hiding the bad stuff.
Some practical examples of "greenwashing":
1. the product range is presented in a one-sided manner.
In the consumer goods sector, primarily organic foods are put in the foreground, or in the fashion/textiles sector, sustainable clothing items ("organic cotton") are given special prominence. What is relevant in each case, however, is the share of the manufacturer's total product range. A dozen "organic sweaters" do not make a brand's range sustainable. The social and wage standards of the textile sewing workers are also essential and have so far been completely underdeveloped. There is only one weapon for this: disclosure of how much is actually paid out to the local seamstresses in wages and where how much of the range is actually produced. Extensive reports have already been written about the true social standards in China or Bangladesh - so far no textile company has done better or brought back its production. Special situations, where every investor has to ask himself the question of sustainability, are things like the CO2-intensive export of mineral water from France across the globe or the sale of hot drinks in paper cups as a central business model. Such corporations are what they are and their shares need not be bought by anyone seriously considering sustainability.
2. industry not environmentally friendly, no matter how much green is painted.
Literally by law of nature, there are industries whose production processes and materials are just not environmentally friendly. This fact is difficult to change, but is now often the linchpin of greenwashing. In Europe and North America, for example, many energy companies still produce only part of their electricity from renewable sources. (The EU's not exactly smart decision on gas and nuclear aside). This circumstance is part of reality and must be recognized and accepted as such. It becomes problematic when investors in particular are made to believe that they are one of the most environmentally friendly energy companies and every second word in their communication revolves around "renewable", "wind" and "solar". However, the majority of their production mix is based on fossil fuels - i.e. oil and natural gas. Consumers and investors are called upon to use common sense.
3. bad marks in recycling
Another important indication for greenwashing is the issue of recyclability. The recyclability can be read off well per company (also part of the GGX ESG data). Companies whose production processes suffer from low waste-recycling ratios should be closely scrutinized. One step more radical is the approach of generally refraining from companies whose product range is poorly recyclable - plastic, Styrofoam, textile blended fabrics or similar elements that are poorly recyclable or not recyclable at all. Plumper is the so-called "junk" ratio in the product range. This describes products whose service life tends to be rather short and/or production is manufactured under particularly precarious situations. Hard hit by this would be, for example, Walmart or the sector already mentioned above, especially fast fashion of the caliber of H&M, Inditex, Primark (Associated British Foods) and similar companies.
What can we do about it collectively?
The solution is surprisingly simple: take a closer look, give greater weight to small print on consumer products, and spend a few minutes researching on the Internet. Furthermore, as described below, the longer the more, action by the individual is also important. In any case, it helps to get information about the companies and their assortment including the production process on the Internet. Obviously, an effect that should not be underestimated can also be generated through actively controlled consumer behavior. In the matter of investments there are specialized forms for the analysis. For professional investors, for example, the ESG raw data and ESG rating offer of GGX is available to measure the effective performance in clearly defined (quantitative) ESG parameters of companies. All information on our GGX Rating here:
Active Ownership also possible as a consumer
Regarding the keyword actionism just mentioned, we should all become aware: A very effective method of assessing greenwashing is conscious communication as a consumer or investor with the company in question - regardless of whether it is listed on the stock exchange or not. Those who lack transparency, traceability and access to information are called upon to contact the companies or their employees directly and to address their questions about products, production or social standards and to demand further information. This is how a targeted, clearly formulated email can help. The way in which the company responds (or does not respond) alone indicates the seriousness with which concerns about sustainability are being addressed. So the next time you have mental question marks at the sight of a green label on a consumer product, email the manufacturer's investor relations team or ESG contact. There is no more direct and better way to live "active ownership" in sustainability.
About the author
Martin Raab is a long-time investment professional, book author, and member of the Board of Directors of Global Green Xchange. He manages the ESG Ratings & ESG Data division. As one of the authors of the newsletter "Green Money" and of ESG Insights, he regularly analyzes and reports on various topics related to sustainability and capital markets.