Can Greenwashing Claims Sink Your Profits? What to Know and How to Respond

Key Takeaways:

• New legal requirements and growing consumer activism can have a strong negative impact on manufacturers facing greenwashing claims
• See how companies are using aPriori’s sustainability maturity model and manufacturing insights to mitigate greenwashing claims

 The Full Article:

More than 80% of companies surveyed view their sustainability strategies over the next five years as a source of potential financial opportunities. That’s according to a recent Morgan Stanley survey of more than 300 public and private companies. And 47% of survey participants believe they have a moral obligation to be sustainable.

Although most manufacturers make sincere sustainability efforts, complex regulatory requirements and the notion that sustainability is cost-prohibitive prevent many organizations from reducing carbon and reaching net zero goals. True sustainability must run through a manufacturer’s entire operations, including the supply chain.

These challenges can lead to intentional or unintentional greenwashing claims and seriously negatively impact business.

What is Greenwashing?

Greenwashing is the practice of making misleading sustainability claims about a product’s environmental benefits or supposed environmental friendliness. Examples of greenwashing include:

• Misleading product labels: Terms such as “sustainable,” “eco-friendly,” and “green” on packaging appear credible. However, without clear standards or data spelled out, it is difficult to substantiate the validity of such claims. The same holds true for a product’s materials and processes. Without concrete evidence, there is no guarantee of true sustainability.
• Cherry picking sustainability data: Many companies are guilty of greenwashing because they choose to focus on just one aspect of sustainability (e.g., recyclable bottles). However, the processes, materials, and supply chains used may be far from green. For example, planting a tree doesn’t even begin to offset the waste and high carbon emissions that each product creates.
• Meeting the bare minimum of sustainability: Some companies make very minor improvements to reduce their carbon footprint. But scratch the surface, and you’ll see that they turn a blind eye to other practices and processes that reveal how insignificant their improvements truly are. For example, Goldman Sachs Asset Management L.P. was hit with a $4 million fine for misleading its customers and failing to follow environmental, social, and governance (ESG) investment policies.

Why Greenwash and How Bad Is Its Impact?

While some companies unintentionally greenwash, those who intentionally greenwash do so to sell more products and/or enhance their brand reputation with consumers, investors, lenders, and shareholders. Simultaneously, they quietly cut corners and skirt regulatory requirements.

Think of these companies as “wooing” financial backers, customers, and the public with false claims of caring about the environment while also benefitting financially and reputationally. In fact, Bloomberg found this problem to be pervasive in a 2022 analysis of companies that secured sustainability-linked bonds.

The U.S. Securities and Exchange Commission (SEC) created a task force in March 2021 to help identify ESG misconduct. It initially focused on greenwashing, using sophisticated data analysis to gather and examine public information to identify cases.

Greenwashing tactics mislead the public and erode trust. More importantly, they perpetuate environmentally unfriendly practices, further accelerating the harmful effects of greenhouse gases.

Governments’ Responses to Greenwashing Claims

In 2015, the United Nations (UN) moved to stem high carbon emissions with the Paris Agreement. The UN provides businesses with a voluntary checklist and guidance for reducing CO2e.

Others, such as the European Union (EU) and, most recently, the Biden Administration, have followed. The EU put its Corporate Sustainability Reporting Directive into effect in January 2023. They also enacted a carbon tax designed to level the playing field. The EU also introduced taxonomy, a classification system defining the criteria for economic activities aligned with net-zero goals by 2050 and environmental goals outside the climate change scope.

The Biden Administration has made various commitments and investments to cut greenhouse gas emissions (GHG) by 50% by 2030 and net zero by 2050. Recently, the administration introduced New Principles for High-Integrity Voluntary Carbon Markets (VCMs). Among the principles are that carbon credits and the activities generating them meet credible atmospheric integrity standards and reflect actual decarbonization. Several California sustainability regulations will be enforced in 2026.

Legal, Environmental, and Consumer Responses to Greenwashing Claims

New regulations and consumer outcries have spurred lawsuits against companies making greenwashing claims. These companies face greater scrutiny of their practices, underscoring the need for sustainability traceability and transparency.

According to the Harvard Law School on Corporate Governance, the accelerated pace of ESG-related legislation leaves companies more vulnerable to greenwashing lawsuits. The lack of a uniform definition of sustainability and its associated terms further muddies the legal waters. For example, the U.S. Federal Trade Commission’s (FTC) “Green Guides” was last updated more than 12 years ago (2012).

The entire product development lifecycle can be subject to scrutiny and class action suits. One example is the supply chain. A manufacturer can make every attempt to be sustainable. However, if it does not have transparency in its supply chain, it becomes guilty by association. Some believe that using/purchasing carbon offsets is a panacea for greenwashing. But even this approach is being challenged from a legal and reputational perspective. Just ask Taylor Swift.

McKinsey notes that 88% of Gen Z say they don’t trust brands’ environment, social, and governance (ESG) claims. Finally, a Deloitte survey of Gen Z and Millennials underscores the generational shift regarding the environment and corporations. Both (57% of Gen Z and 56% of Millennials) report that they hold sway over protecting the environment. Of these two groups, 65% and 68%, respectively, believe business has the power to protect the environment. Most astoundingly, 75% of all respondents said an organization’s societal impact and community engagement were an important factor when considering a potential employer.

All organizations need to heed the demands of governments, legal entities, environmental groups, and consumers to enact change from a sustainability standpoint.

aPriori Helps Manufacturers Mitigate Greenwashing Claims

What can manufacturers do to ensure sustainability and substantiate their efforts? Traceability and transparency can address both. aPriori can help manufacturers achieve both and mitigate inadvertent greenwashing. Here are a few ways how:

aPriori’s four-stage sustainability maturity model integrates traceable green practices into manufacturing while balancing profitability and environmental impact. This framework guides manufacturers toward environmental stewardship using data-driven insights to make effective design, sourcing, and production choices. Equally important, it provides them with transparent and auditable reporting to meet compliance standards.

Greenwashing Scrutiny Will Intensify

Regulatory, legal, environmental, and reputational scrutiny of greenwashing will intensify. Consumers are savvier and more vocal than ever, wielding tremendous influence over political, legal, social, and environmental entities.

No organization can be complacent about greenwashing. aPriori can help them navigate the complexities AND ensure sustainability, compliance, profitability, and time to market. Best of all, aPriori’s transparent and auditable sustainability results can actually substantiate a manufacturer’s claims.