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Greenwashing: Where Risk Management and ESG Meet

We’re all transitioning to a green economy. The one consistent risk: Getting left behind.

Greenwashing: Where Risk Management and ESG Meet - Peter GranatAs the effects of climate change continue to impact our health, environment, and economy, investors from every industry are paying close attention to Environmental, Social and Governance (ESG) issues. We will continue to see these investors use their influence to demand greater accountability from organizations and demand action in critical sustainability efforts like carbon emissions.

To meet these emerging demands, companies will need to strike a balance between defending their bottom line and demonstrating progress on ESG initiatives. Unfortunately, some organizations have turned to techniques such as “greenwashing” as a means of inflating the impact of their efforts.

In my 20 years of experience leading reputation management platforms, including the earned media and services provider Cision, these efforts remind me of “PR spin.” Providing a biased interpretation of a product or benefit to influence public perception is something I’ve seen brands do time and time again, and in the age of ESG disclosures, I’m sure we’ll see more greenwashing even if it’s not intentional.

To avoid the very real reputational risks associated with accidental greenwashing, organizations must embrace ESG and sustainability metrics and set achievable goals to show true impact.

The evolution of greenwashing

Greenwashing was originally a term used to describe an advertising gimmick to mislead consumers that they are buying an environmentally safe product. As consumers became more particular about choosing more natural and sustainable goods, companies began updating their product packaging with terms like “environmentally friendly,” “green,” or “clean.” While many companies did alter production and sourcing to make less of an environmental impact, others exaggerated eco-friendliness or lied about it altogether because consumers will pay more for sustainable products.

Prominent examples of greenwashing leading to litigation include Nestle marketing chocolate as sustainably sourced despite the supply chain having “virtually no standards in place,” and Banana Boat marketing products as “Reef Friendly” when they contained ingredients directly harmful to coral reefs and marine life. In one of the most egregious examples, Volkswagen and Audi knowingly used emissions-cheating software to advertise their diesel vehicles as environmentally friendly.

Today, greenwashing is becoming an issue that applies to even more than just consumer products, as organizations work to convince investors that their business operations are sustainable.

What operational greenwashing looks like

The most prominent ESG trend among high-profile companies at the moment is “carbon-neutral.” To achieve net-zero carbon emissions, companies most frequently opt to purchase “carbon offsets.” Carbon offset credits come in four primary forms: Forestry and conservation, renewable energy, community projects and waste-to-energy projects. The idea is that the emissions produced by the company are zeroed out by contributions to projects that remove carbon from the atmosphere.

However, investors and environmental watchdogs are beginning to raise doubts about this strategy. It may look good on paper, but dubious calculations and questionable impact of offset projects are revealing carbon offsets to be something of a smokescreen allowing companies to continue polluting the environment while claiming to be environmentally friendly. Greenpeace has declared in no uncertain terms that carbon offsets are a flat-out scam.

The risks of greenwashing with carbon offsets are becoming starker. If a company can’t back up its claims of climate friendliness with tangible metrics, reputational damage is almost certain and poses a significant threat to operational resilience. To avoid claims of greenwashing, unintentional or otherwise, organizations need to implement ESG metric collection and analysis through the lens of risk management.

Cultivating transparency and trust

Investors are no longer willing to accept claims of ESG progress on the honor system. It’s time for ESG departments to step up and take on the mantle of sustainability plans backed by data that drive meaningful improvement. “Net-zero” is quickly becoming the bare minimum goal, and companies that embrace a push toward real zero are going to have an advantage in the coming years.

That said, providing the specific goals investors want to see means risking a broken promise if efforts are too far out of reach. Companies should mitigate that risk by using integrated software platforms that are able to accurately capture the current state of their environmental impact, allowing leaders to develop and report on realistic roadmaps for progress. These tools have the power to illuminate areas of opportunity and efficiencies that keep profitability intact while fulfilling investor demands for transparency.

Getting serious about ESG goals

We are in the midst of a global shift toward clean energy and decarbonization. As innovators in every industry compete to prove they are reducing negative environmental impact and making meaningful contributions to the wellbeing of our planet, it’s time to reevaluate how ESG efforts will position your organization in the new net-zero economy. As BlackRock’s Larry Fink said recently in his annual letter to CEOs, sustainability and profitability are not mutually exclusive. Every company in every industry is going to be transformed by this transition to a green economy, those that don’t adapt risk being left behind or replaced.

There is simply no way to avoid taking a stance on climate impact. However, doing so in the wrong way—such as by skirting emissions through purchasing carbon offsets—can lead to accusations of greenwashing and subsequent damage to the organization. Now is the time to elevate ESG to a core pillar of your risk management strategy and legitimize organizational efforts with real data that proves your commitment to the causes investors care about.

Peter Granat is the CEO of SAI360.

Read more about how SAI360 is helping to launch the building blocks for ESG and sustainability.

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