Stock photo by Vecteezy

Just as with many emerging concepts and schools of thought throughout history, after initial explorations and imperfections, maturity is inevitably reached. The issue of 'greenwashing' will gradually fade as systems and regulations improve, and genuine green and sustainability will become the shared aspiration of enterprises and investors.

Overview of ESG Development

With the rapid development of the global economy and society, corporate responsibility and sustainability have gradually transitioned from being marginal topics under Corporate Social Responsibility (CSR) to becoming central concerns for both investors and consumers. Against this backdrop, ESG has been widely discussed and integrated into corporate strategies, representing a new business ethic and vision for the future.

In recent years, especially driven by green agendas such as 'carbon neutrality' and 'carbon footprint', many enterprises have begun to more actively promote their environmental friendliness. This is not only out of genuine concern for global climate change but also because companies recognize that showcasing their green attributes can win the favor of consumers and the preference of investors. Such a shift signifies businesses seeking differentiation in competition, and it also reflects the growing awareness and demands of consumers and investors regarding ESG.

With the promotion of the ESG concept, a pressing issue has gradually emerged - 'greenwashing.' While many companies ardently tout their environmental, social, and governance achievements, there are no shortages of those that are all shown with minimal actual effort. Some businesses overly advertise their contributions to environmental friendliness or sustainability, yet their actions fall significantly short of their claims. This phenomenon is increasingly drawing the attention of the public and regulatory bodies, becoming a hot topic in the market.

Greenwashing and the Underlying Causes

The term 'greenwashing' was first coined in 1986 by American environmentalist Jay Westerveld, aiming to describe businesses that advocate for environmentalism in name only, but in reality, act mainly to cut costs. For instance, hoteliers might encourage tourists to reuse towels, claiming it's to reduce ecological impact, but the underlying reason might simply be to save on operational costs.

As time progressed, the definition of greenwashing expanded and deepened on a global scale. Today, many organizations and authoritative dictionaries have offered their definitions. The Cambridge Dictionary defines greenwashing as 'a situation in which a company advertises its products as being more environmentally friendly than they really are'. Such behavior is not limited to minor marketing strategies; it has even affected large enterprises and their product lines.

A study conducted in 2007 by the American environmental marketing company Terra Choice provided an in-depth analysis of the greenwashing phenomenon. They identified what they termed the 'Seven Sins of Greenwashing,' which include: the Sin of the Hidden Trade-Off, the Sin of No Proof, the Sin of Vagueness, the Sin of Irrelevance, the Sin of the Lesser of Two Evils, the Sin of Fibbing, and the Sin of Worshipping False Labels.

Data suggests that the phenomenon of greenwashing has garnered widespread attention in recent years. The Massive Arithmetic Index shows that compared to 2021, the comprehensive attention index on greenwashing in 2022 has increased by 100% year-on-year, with the search index also seeing a rise of 54.55%. This clearly indicates that the public's awareness and ability to distinguish between genuine environmental actions and mere greenwashing tactics for market strategies are gradually strengthening.

Recently, Professor Liang X, the head of Sustainable Infrastructure Transformation at University College London (UCL), delivered a speech at the Corporate ESG Innovation and Chinese-style Modernization Summit. He posited that there are mainly five reasons behind the current greenwashing issue.

Policy-driven Greenwashing:

When crafting relevant policies and regulations, the definition of 'green' may not be stringent and clear enough. Such ambiguity might lead to certain controversial or high carbon-emitting projects being erroneously labeled as 'green'. For instance, within the EU's taxonomy for sustainable activities, natural gas and nuclear energy have been ultimately deemed sustainable, causing global contention.

Compromising Other Environmental, Social, and Governance Standards for One Green Activity:

In the pursuit of a certain green benefit, other environmental, social, or governance elements might be harmed. For example, constructing a hydroelectric project might disrupt the ecological environment or biodiversity or perhaps affect local communities. Even if a project appears 'green' from one perspective, it might have detrimental effects on the environment or communities when viewed more broadly.

Selective Disclosure of Information:

Corporations or institutions might opt to showcase their achievements in the green domain, selectively revealing only their positive green investments or activities while sidestepping their less environmentally friendly aspects. Financial institutions might declare support for renewable energies, but not disclose their financing activities for fossil fuels, particularly coal, potentially misleading investors and the public.

Inaccurate Representation in Information Disclosure:

This pertains to how emission reductions or other environmental metrics are calculated and reported. Projects might exaggerate their carbon reduction impacts or only tally direct emissions, overlooking indirect ones. Such imprecise information can mislead investors and other stakeholders, causing them to misjudge a project or company's environmental performance.

Issues of Additionality and Double Counting:

Additionality refers to whether the environmental benefits of a project or activity are genuinely 'additional', i.e., realized solely due to that project or activity. Double counting, on the other hand, involves the same emission reduction being claimed by multiple parties. For example, if the emission reduction of a wind energy project is claimed by the construction company, the investing company, and the financing company, this constitutes double counting. This can lead to overestimation of emission reductions, thereby misleading investors and other stakeholders.'

2022 China Greenwashing  List

Based on years of observations on greenwashing phenomena, Southern Weekly launched the '2022 China Greenwashing Ranking.' Their research identified greenwashing practices at three primary levels: companies, products, and services. It also distinguished greenwashing methods into two categories: proclaimed greenwashing and behavioral greenwashing. The evaluation covered listed companies, China's top 500 enterprises, and Fortune 500 companies operating in China.

A total of nine companies made it to the list, including Tesla (TSLA), SanYuan Foods (600429:SH), Huatong (002840:SZ), Xinhua Pharmaceutical (000756:SZ,0719:HK), New Hope (000876:SZ), China Railway Group (601390:SH), China Shenhua Energy (601088:SH,1088:HK), SHEIN, and H&M. These companies span various industries, such as passenger cars, food, chemical pharmaceuticals, breeding, construction, and clothing.

Previously, we released EqualOcean | 2022 China Greenwashing List, in which we reviewed the actions related to ESG of the 20 companies that were selected for their greenwashing practices. Click here to read full article.

How to avoid greenwashing?

EqualOcean believes that to avoid the risks of greenwashing, a scientifically rigorous ESG evaluation system and a comprehensive internal and external regulatory mechanism will be two powerful levers. As the concept of ESG rapidly evolves, we need not only to ensure the continuous iteration and refinement of evaluation criteria but also to make sure there is strong regulatory backing to ensure that these standards are not just rhetoric on paper, but are genuinely implemented.

Enhancing ESG-related standards from multiple dimensions

First and foremost, when defining green or sustainable sectors, it is essential to ensure clarity and precision in the concepts used. Whether different industries truly belong under the labels of 'green' or 'sustainable' should undergo thorough and careful analysis. The EU's controversy over the categorization of natural gas and nuclear energy undeniably highlights the importance of clear classification. In this context, the 'Green Industry Guidance Catalogue' and 'Social Bond Principles' can be used as references for such classifications. As the industry and research evolve, we should anticipate these documents to undergo continuous iterations, reflecting the latest understanding and practices.

Secondly, a more objective ESG evaluation system should be established. For companies from various sectors, evaluations should take into account industry-specific characteristics and place emphasis accordingly. Subtle changes in energy-saving and emission reduction within the traditional energy sector might yield them greater utility in ESG ratings than in other sectors. This could potentially dampen the enthusiasm of companies in other sectors to genuinely improve their ESG performance and instead opt for 'greenwashing' to swiftly enhance their standings.

Lastly, the ESG rating system should move from abstract to concrete. Evaluations of a company's ESG performance should transition from simply checking if they 'did it' to assessing 'how well they did it.' However, this task is not straightforward. While environmental data like pollutant discharge and carbon emissions can be quantitatively analyzed, defining 'how well' a company performs in social and corporate governance aspects poses a significant challenge. If progress could be made in this area of the ESG evaluation system, it would be immensely beneficial in reducing instances of 'greenwashing.'

Strengthening Internal and External Oversight

As the ESG rating system evolves, regulatory oversight is crucial to curb 'greenwashing.' Firstly, external oversight should be bolstered. This encompasses several areas, such as mandatory information disclosures imposed by relevant departments and setting standards for the depth and breadth of information disclosed. Regulators need to drive these policies forward. In China, state-owned and centrally-administered enterprises listed on stock exchanges are already mandated to fully disclose their ESG information. However, for private enterprises, especially smaller-sized ones, this could be a prolonged journey. Overly stringent disclosure requirements might become a burden on their operations.

The external oversight should also intensify auditing efforts on relevant information, such as verifying carbon footprints and auditing carbon emissions. This aims to mitigate the issues of additivity and double counting mentioned earlier. It's a complicated task and might necessitate the creation of regional or even national auditing platforms to ensure data sharing, which would help prevent multiple counts of the same data and guarantee the accuracy of disclosed information.

Moreover, internal oversight needs strengthening, making information disclosure and propagation a requirement for internal compliance. Achieving robust internal regulation isn't straightforward. It demands a profound understanding of ESG principles by all management and staff. This is fundamentally a transition for businesses from traditional management ideologies to ESG-focused ones, necessitating collaborative efforts from society at large, markets, regulators, and businesses.

Bottom line

As the concept of ESG increasingly garners widespread attention, 'greenwashing' has emerged as an issue that cannot be ignored. The appearance of this phenomenon is largely due to the deficiencies in the current ESG evaluation system and lack of oversight. However, as history has shown with many emerging concepts and schools of thought, after initial exploration and imperfection, they inevitably mature over time. With our deepening understanding of ESG, the continuous refinement of the evaluation system, and strengthened regulatory efforts, we have every reason to believe that the issue of 'greenwashing' will gradually diminish, if not be entirely eradicated.

In the future, the disclosure of ESG information is expected to hold a position of importance comparable to that of financial disclosures and will be integrated into the standard procedures of corporate governance. Just as financial disclosures, after years of evolution, have become vital references for investors and stakeholders in decision-making, ESG information will offer a more comprehensive portrait of companies, assisting us in better understanding their social, environmental, and governance performances. Through this lens, corporations will not solely be entities pursuing profits but will evolve into organizations genuinely shouldering social responsibilities and aiming for sustainable development. In such a landscape, the phenomena of 'greenwashing' will be rendered obsolete by history, with genuine sustainability and environmental consciousness becoming the shared pursuit of both corporations and investors.

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