Recent climate action underlines how all corporates urgently need to recognise the threat of greenwashing as embedded material risk

 

Written by Kathleen Enright, Global MD, Salterbaxter

The latest greenwashing scandal surrounding Shell is a stark wakeup call to all businesses. Shell’s directors themselves are being sued by environmental lawyers ClientEarth[1] for failing to accelerate energy production away from fossils fuels. In the first case of its kind to hold corporate directors personally liable, the claimants say Shell’s climate strategy does too little to meet global climate targets.

Shell isn’t alone. Greenwashing as the non-disclosure of embedded risk is an issue that should be deeply rooted in corporate strategy, governance and long-term business survival. If you’re still viewing it as primarily a marketing problem, you’ve missed its very significant evolution.

It’s a risk all corporates have to address. The eyes of activists, shareholder or otherwise, may be on the fossil fuel companies[2] – as critical scrutiny of the industry is undeniably necessary to drive changes in advertising and lobbying standards, as well as the energy transition – but the focus on oil and gas has been letting too many other sectors off the hook. Attention will soon shift, and any business concealing climate risk will come under fire.

The evolution of greenwashing to non-disclosure of climate-related risks is effectively driving business to set and to disclose their climate mitigation strategies. It’s pushing business towards sustainability as a legal obligation.

 

Mismatch between environmental claims and action is endemic

The Shell case also underlines the urgency with which companies need to evolve their understanding of greenwashing as a material risk. Currently, the mismatch between environmental claims and action is endemic. In a global Harris poll for Google Cloud[3], 58% of C-suite leaders admitted their companies overstated their green efforts, and 66% questioned how genuine their organisation’s sustainability initiatives were.

This disconnect is calling into question the viability of businesses. In PwC’s 26th Annual Global CEO Survey[4], 40% of global CEOs said their organisation will be economically unviable in 10 years if it continues on its current course. The need to focus on short-term economic pressures balanced against the requirement for long-term business transformation is creating a state of paralysis, and in some cases even denial.

Where businesses haven’t figured out how their sustainability strategy works to deliver their corporate strategy, they’re choosing not to talk about it. And if they’re not talking about it, it can all too easily become tomorrow’s problem. That inactivity is going to cost them dearly, and maybe in ways they do not yet comprehend. If corporates don’t catch up with the growing focus on environmental claims by regulators, activist groups and legal systems, they will face punitive action.

 

The real price of greenwashing

The situation outlined above is due, in part, to the ongoing, overly simplistic view held by many boards of greenwashing as a reputational issue linked to dodgy advertising claims. They see it as a problem for brand and communications teams to manage. If their advertising falls within regulatory standards, they believe greenwashing isn’t a risk.

But that’s an outdated view of corporate risk and liability. Greenwashing doesn’t just create reputational turmoil for the marketing team to weather – it encompasses non-disclosure of embedded risk, with legal and regulatory consequences that threaten the entire organisation.

The plague of green misdirection, infecting all areas of corporate and performance reporting, impacts a broad tranche of organisations. It is fuelling a distorted view of corporate environmental action which, in turn, creates a false impression of progress towards halting the climate crisis. Companies that greenwash are storing up risk, impacting all stakeholders, at the expense of a realistic picture of climate mitigation and resilience.

Greenwashing is now considered a material risk by regulators across all sectors and many have committed to taking action against companies failing to substantiate their sustainability claims. In February, the ASA updated its guidance on environmental claims[5] in advertising to include specific standards around ‘carbon neutral’ and ‘net-zero’ references, catalysed by research[6] which showed little consensus and active confusion among consumers about the meaning of the two terms. The advertising watchdog now requires environment-linked adverts to avoid unqualified claims and base any projected goals on existing strategies and says it will crack down on organisations which make unsupported green claims.

 

A storm is about to break

Greenwashing isn’t just going to result in a slap on the wrist, or a temporary reputational dent. Overstating environmental achievements and failing to institute sustainable business practices has already become an embedded liability that is impacting brands and corporate boards.

And therein lies the tension. Businesses are being urged to increase levels of transparency and disclosure, but they fear exposing themselves to a backlash. Some corporations are attempting to limit undue attention by scraping by on the bare minimum of compliance, but regulators are becoming wise to ‘greenhushing’[7] – deliberate under-reporting of climate impacts or ESG credentials to give the impression of being quietly conscientious rather than loudly virtuous, in order to avoid scrutiny.

Meanwhile, stakeholders will abandon organisations that wilfully misrepresent their green credentials. As climate change impacts everyone’s lives, claiming to be part of the solution while actually courting environmental disaster will cause businesses to haemorrhage customers, profits and talent, ultimately leaving them unable to operate.

At the other end of the spectrum, embracing radical transparency will build consumer trust and boost reputation. Witness the Ace & Tate “We f*cked up” blog[8], owning their mistakes around sustainability, and promising to focus on “good changes rather than changes that look good”. This mea culpa approach allows companies to experiment, make mistakes, and therefore accelerate progress towards sustainable operations.

Ultimately, if a business has faith that its level of ambition, commitments and targets are realistic, and that its strategy is agile, actionable and drives real change – even if certain areas need shifting up a gear or two – then there should be no fear or risk in talking about it. Transparency is not the enemy. Lack of credibility, action and progress is.

But, unless and until greenwashing in all its forms is swept away, we see a perfect storm building on the horizon that many previously protected, and consequently complacent, industries are wholly unprepared for.

References

[1] https://www.clientearth.org/latest/latest-updates/news/we-re-taking-legal-action-against-shell-s-board-for-mismanaging-climate-risk/

[2] https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0263596

[3] https://cloud.google.com/blog/topics/sustainability/new-survey-reveals-executives-views-about-sustainability

[4] https://www.pwc.com/gx/en/issues/c-suite-insights/ceo-survey-2023.html

[5] https://www.asa.org.uk/news/updated-environment-guidance-carbon-neutral-and-net-zero-claims-in-advertising.html

[6] https://www.asa.org.uk/news/new-research-into-understanding-of-environmental-claims.html

[7] https://www.ft.com/content/5fd513c3-e23f-4daa-817e-aa32cf6d18d4

[8] https://press.aceandtate.com/202389-look-we-f-cked-up