A Business case for steering clear of Greenwashing

“...a lot of companies and company leadership believe that whether(e.g.) environmental issues are relevant or not to them, doesn’t really matter. It’s only about what the market requires from the company and how to satisfy it. So, if [a]  big part of the market wants something or wants to see something, then let’s give it to them.”

- Tom Bangemann, Head of Data development and research for SSON Research & Analytics.

This quote accurately captures the prevailing corporate attitudes toward environmental responsibility. But climate change is not a threat for tomorrow, it rather is an issue threatening human existence today. According to IBM, climate change presents operational and financial risks to organizations across various sectors. From damage to assets and infrastructure to disruptions in operations, displacement, and logistical challenges, climate risks pose a significant threat to all businesses. In this context, while it is crucial for companies to promptly acknowledge and address climate as both a risk and an opportunity, many instead resort to greenwashing, failing to confront these challenges effectively. The term "Greenwashing", coined by Jay Westerveld in the 1980s, refers to deceptive practices businesses use to falsely portray themselves as more sustainable. This involves creating misleading impressions or providing inaccurate information about the environmental benefits of a product or service.

The growing trend of greenwashing can be seen in the light of a report by the Economic Times which holds relevance. According to the report,  the growth in assets under management (AUM)—a key factor shaping investment strategy, could result in ESG funds accounting for 34% of the total AUM in India by 2050, indicating the significant market value of these funds. In this context, it is of absolute importance for businesses to steer clear of greenwashing practices to derisk climate investments, build consumer confidence, ensure brand integrity, and eliminate ‘greenhushing’. 

De-risking climate investments

According to the world investment report  published by UNCTAD in 2024, greenwashing is the biggest obstacle to the sustainable fund market.   This is because, on average, green funds have only around 20% net exposure to climate-positive assets (assets that aim beyond carbon neutrality) with less than 5% of these funds completely free of oil and gas assets. Consequently, new fund launches have declined, dropping from a peak of 240 funds in the fourth quarter of 2021 to 121 in the fourth quarter of 2023. Overall, 565 funds were launched in 2023, down from 682 in 2022.  This trend indicates a declining trust in the sustainable fund market by investors.

As the government broadens its regulatory attention to sustainability, corporations must also create the capacity to comply with these legal targets. Greenwashing practices will create a hostile investor environment hindering a business's ability to meet government targets, consumer expectations, and resulting in missed growth opportunities.

Building consumer confidence           

Having healthy sustainable practices is essential for companies, as it contributes to building consumer trust. Companies can stand the risk of losing their significant consumer base. According to EY’s Future Consumer Index, 70% percent of Indian consumers prioritize sustainability in their purchasing decisions, significantly higher than the global average of 37%. In countries like the UK where similar trends prevail, more than half (54%) of the consumers would stop purchasing from a company if it was discovered to have made misleading sustainability claims, according to  new research from KPMG UK. Therefore, exercising conscientiousness and ensuring integrity in the products and services offered can earn business a great deal of trust from its consumers.

Brand Image

Recently, many greenwashing behaviors have been repeatedly exposed. For instance, Volkswagen admitted to installing “cheating devices ” in its diesel vehicles to manipulate emission tests. This led to a severe trust crisis for Volkswagen, resulting in a significant drop in its share price. Brand image plays a crucial intermediary role in the relationship between green marketing and brand trust. Brand image establishes the emotional connection between the consumers and the company. Therefore, it inevitably becomes the responsibility of the companies to respect these emotions in order to maintain their brand image.

Eliminates greenhushing

Greenhushing refers to companies deliberately keeping quiet about their climate strategies, either by evading questions or refusing to disclose information. Large companies that emit the most pollutants are usually under tight scrutiny. For example, the BRSR framework in India is only applicable to the top 1000 listed companies.Therefore, this phenomenon might be prevalent in small and medium-sized companies. Companies adapt these strategies to avoid being called out for greenwashing. Essentially, greenwashing acts done by large corporations and the consequent punitive actions taken by the regulators threaten small companies, as they fear being called to question by regulators for greenwashing for their genuine sustainability efforts. This, in turn, creates an unhealthy environment for businesses in the market to flourish and grow. Greenwashing by a few firms can have unintended consequences that might become detrimental for the market as a whole.

Way forward

Corporate leadership has a crucial role to play in avoiding many negative consequences caused by greenwashing. A research article published by Journal of Management and Governance suggests that board independence is positively linked to greenwashing behaviors. That is to say, the presence of independent board members paradoxically tends to increase greenwashing. The rationale given is that independent directors may have a personal interest in the company appearing green, as this boosts the company's reputation among stakeholders and, in turn, enhances the directors' reputations as ethical and responsible leaders. Therefore, democratizing the board process might help in tackling the challenge.

This needs to be clubbed with supply chain hygiene practices such as exercising green sourcing practices. Green sourcing or green procurement refers to the purchase of goods and services that cause minimal adverse environmental impact. This may facilitate supplier evaluation, supply chain resilience, and compliance with regulations.

In summary, Greenwashing can attract  many challenges for the business.The strategies proposed are effective only when firms undergo a crucial shift in mindset — that ESG reporting and sustainability practices are not merely compliance requirements, but can serve as powerful drivers of value creation.