The so-called ESG criteria (Environmental, Social and Governance) have attracted widespread attention among companies and investors following the publication of the EU taxonomy (“Regulation (EU) 2020/852”) in 2020 by the European Union (EU). The purpose of the ESG criteria is to create a standardised legal framework for sustainable corporate action. Apart from environmental and climate protection, the legislator has also included social aspects and good corporate governance. For many companies it is clear that comprehensive sustainability is crucial for long-term economic success.
However, against this background, headlines have accumulated in recent years about companies that have misled stakeholders and consumers through so-called “greenwashing”, and as a result have attracted negative attention in the global media channels. Companies have tried to present themselves as particularly sustainable – often with targeted advertising and PR measures – instead of actually setting sustainable priorities. Above all, the share of “green” companies in financial investments that seem to be particularly environmentally friendly is growing very strongly, which has increased the risk of greenwashing.
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Gunter Lescher
Partner, Forensic Services at PwC Germany
Tel: +49 151 12198599
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A fine line between beautifying and misleading
More and more companies are listed in funds that are labelled with buzzwords such as “ESG” and “sustainable”. However, to be seen by investors as environmentally- and climate-friendly, they do not take the terms and their interpretation too seriously. As a new study shows, sustainability is often only found in the title: out of 2,000 funds examined, 650 call themselves “sustainable”. Out of these, however, merely 104 are clearly committing to the generally accepted purposes of ESG.
Nevertheless, a case of ESG fraud is difficult to identify in this case because such “labelling” is not prohibited under EU law. This is mainly due to a legal loophole in the EU taxonomy: an EU-related company is allowed to define its own sustainability criteria. With transparent disclosure, these companies are allowed to name themselves accordingly. Other cases of greenwashing occur when, for example, insufficient attention is paid to the actions and compliance of one's own company and those in the supply chain.
Threats of reputation-related damage and diminished corporate value
However, the consequences of greenwashing are often severe and remain similar for companies in all scenarios. Once the green façade crumbles, sustainable products turn out not to be sustainable at all, companies obviously fail to live up to their responsibilities. This harbours the threat of massive reputation-related damage among shareholders and consumers. Many companies underestimate the accompanying negative impact on the value of the company.
Thus, it is crucial to consider the risk of greenwashing in the business model and operations in order to weigh up and minimise potential risks already early on. Attention should also be paid to suppliers and business partners' increasingly complex global networks. After all, a multitude of regulations make companies responsible not only for their own actions, but also for those of their contractual partners.
More Information
ESG fraud and greenwashing: safeguarding your reputation and retaining customer trust
Effectively preventing greenwashing and related allegations
Sound corporate governance is essential in order to reduce reputational risk, caused by greenwashing and related allegations. To prevent greenwashing, it is crucial to review existing processes and established controls. This will help to determine how effective they are in protecting the company's reputation and sustainable success in the public. In addition, relevant business partners, such as key suppliers, should be reviewed to identify risks related to economic exploitation, environmental violations, health and safety violations and human rights abuses already at an early stage, which, if unknowingly occurring, can potentially cause significant damage to the company's reputation.
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