Reducing negative environmental and social impact is paramount among large corporations, while startups today must show their eco-credentials from day one.
A 2022 Google Cloud poll revealed 80% of CEOs felt they were doing a good job with their company’s environmental sustainability. However, when quizzed whether they had overstated their sustainability performance in the past, 58% of those same executives admitted that was probably the case.
Overstating sustainability performance is a form of greenwashing. It’s largely caused by the pressure for companies to appear ‘green’ that has been on an ever-increasing upward trajectory since the concept of sustainable development was introduced in the late 1980s.
More recent developments, such as the Paris Agreement’s 1.5C global warming target established in 2015, have given sustainability a more prominent role as a driving force in today’s business agenda.
With companies increasingly adapting to fit within a greener economy, establishing who is genuine and who is overstating their performance becomes a central issue.
What is greenwashing in business?
Greenwashing can take many forms: companies can overstate the benefits of their product or service, produce reports that leave out key data, divert attention from their negative impact, or produce baseless claims without evidence to back them up.
Broadly speaking, greenwashing can be defined as a gap between the statements a company makes and the actions it takes on sustainability. Often, it’s simply a case of only reporting the good news.
The incentive is clear: appearing ‘green’ appeals to an increasingly ethically conscious consumer. If customers are more likely to buy a sustainable product, greenwashing can positively impact a company’s bottom line.
The cost of sustainable transition also provides an incentive. Typically, this requires fundamental change at a business model level: finite resources may need to be swapped for sustainable alternatives, for example, or supply chains may need to move across the globe.
Yet, greenwashing isn’t always done with profit or cost-saving in mind, it can also be accidental, explains Judith Stroehle, assistant professor of sustainability governance at University of St.Gallen.
“Misleading information often doesn’t actually come from the intent of creating misleading information, but simply from the fact that there’s not a good process or well thought out strategy behind how this information is put out there,” she says.
The impact of greenwashing in business
While it has the potential to provide a revenue boost, there are myriad downsides for a company that is greenwashing.
Typically, the negative outcomes occur after being exposed, however that isn’t always the case, explains Ioannis Ioannou, associate professor of strategy and entrepreneurship at London Business School.
“Employees are the first people who are going to see from the inside and realize that your communications might not match with what you’re actually doing,” he says.
Greenwashing companies therefore run the risk of disillusioning their employees and even losing those whose values aren’t aligned with their practices.
For companies publicly accused of greenwashing, the impact can be more severe. In 2015, car manufacturer Volkswagen was found to have understated its environmental impact by 40 times while cheating emissions tests.
The ensuing fallout proved costly: CEO Martin Winterkorn resigned, cars were recalled, litigation followed, and more than $30 billion in fines and damages was paid. Though ‘dieselgate’ didn’t prove existential, VW’s reputation took a large hit. More than eight years later, Winterkorn is still dealing with the consequences: he was forced to publicly refute accusations of deceiving investors in court early in 2024.
“If your customers realize that what you’re selling is not as environmentally responsible as you claim, especially if those customers came to you because of those claims, then you open yourself up to huge reputational risk,” Ioannis adds.
The rise of regulation and technology in the fight against greenwashing
A lot has changed since the VW scandal, but greenwashing remains a prevalent issue today.
In 2023, DWS—an investment firm backed by Deutsche Bank—agreed to a $25 million settlement after it was accused by investigators at the US Securities and Exchange Commission (SEC) of not implementing policies it had promised to investors while claiming itself to be a leader in ESG investment.
But there is cause for positivity amid ongoing regulatory developments. For example, the EU Taxonomy, the EU's Corporate Sustainability Reporting Directive (CSRD), and the UK’s Sustainability Disclosure Requirements (SDRs) all stipulate that companies must be more transparent across all areas ranging from financial resources to hiring practices, while also complying with rules on the use of language in marketing material.
Similarly, the International Sustainability Standards Board (ISSB) introduced its inaugural global sustainability disclosure standards in June 2023, providing a standardized framework by which companies can provide sustainability-related information within the same reporting package that they provide for their financial statements.
The move mirrors the shift towards standardized financial reporting that took place in the 1970s and today ensures that companies must keep rigorous accounting practices and produce standardized financial reports.
“Having standards that make performance transparent, comparable, and reliable will certainly help,” says Robert (Bob) Eccles from Oxford Saïd Business School.
“Standards are important because you’ve got a fact base to start from, so it helps make a more authentic conversation,” he adds.
However, regulation without repercussion for underperformers cannot ensure that companies become more sustainable.
There is also a question of time: while in 2023 the ISSB delivered IFRS S1 and IFRS S2, its two inaugural standards, companies are not currently required by law to comply.
“You have to be realistic about how long it’s going to take to get these standards passed,” Bob adds. “People have to learn how to do it and then how to use the information, it’s not like you’re going to flip a switch.”
Another cause for optimism is technology. Innovations in areas such as artificial intelligence mean there are now companies offering automated ESG data collection and reporting software. This makes accidental greenwashing less likely, says Ioannis.
“If you have an algorithm that can analyze your data, compare it across your industry, over time, and across different types of disclosures then this is analysis that humans can’t do.”
Greenwashing in business: how business school can help
While regulation and technology can help make it less prevalent, the fundamental cure for greenwashing lies with companies becoming more sustainable.
That means businesses enacting the fundamental changes that are both costly and time consuming, but also essential to meeting international climate targets.
“This [sustainability] is the big issue that we are facing, and companies face it whether they want to admit it or not. Very often the ones that don’t want to admit it are the ones who end up greenwashing,” says Judith from St.Gallen.
Companies must devise transition plans that include targets backed up with clear strategies showing how they can be achieved. However, a lack of expertise contained within companies has provided a barrier to this in the past.
“We genuinely lack the expertise within companies on how to deal with this topic,” she adds.
Businesses increasingly look for applicants with sustainability knowledge and skills. According to the 2023 LinkedIn Green Skills Report, the number of job postings that explicitly list at least one green skill rose by a median of 15.2% between 2022 and 2023.
As business schools, too, adapt by incorporating sustainability into the curriculum and launching specialized master’s degrees, Judith feels this could help fill the sustainable skills gap and help companies become more sustainable.
“My big hope is that with an upcoming generation of new leaders that have actually studied this topic at university, at least that component of missing expertise will become less of an issue.
“If you do want to do an MBA, go to a school that gives you a good sustainability option because that is the big challenge that we're facing today."
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