ABSTRACT
Consumer’s environmental and social awareness has increased over the years and this is clearly reflected by the increasing demand for environmentally sustainable products. Unfortunately, this has often been considered by companies more as an opportunity to increase profits than an actual urge to shift the production toward more sustainable patterns. Greenwashing, the act of misleading consumers regarding the environmental practices of a company, dates back to the ’60s and since then it had a negative impact not only on consumers but also on effectively virtuous firms that see their efforts vanished in unfair competition. In this article, we aim at presenting a brief excursus of the path toward an effective regulation on greenwashing focusing on the main difficulties and obstacles faced, and also on possible solutions. Our analysis is conducted as a literature review. Our assumptions are based on the work of recognized experts of the sector, then enriched with our considerations arising from various reflections on the theme due to a recently started research project. What emerges from our analysis is that the main problem when dealing with greenwashing is the lack of clear and universal legislation. In fact, in a reality where companies act on globalized markets regulations should not know boundaries. Otherwise, as shown in the article, the same instruments theoretically created to avoid greenwashing become the ideal vehicles to pursue it. We analyzed both legal (ESG ratings and certificates) and financial tools (GreenBond). The first two present problems concerning the absence of universal standards and a superficial understanding of the company’s functioning and structure while the second lacks international alignment. The main conclusion we present is that enforced regulation is the most effective means to address the problem of greenwashing and in this regard, the European Union positions itself as a leader. With the Taxonomy Regulation of 2020, an important step has been done. Unfortunately testing its effectiveness is a long run and, in the meantime, other actions are needed. We wonder then whether a mechanism acting on the prices of the certifications (tailored considering the impact analysis of the single companies) could represent a valid intermediate step.
Consumers are increasingly demanding environmentally sustainable products. Market analyses show that products featuring on-pack sustainability claims increased by 2.3% of the market from 2013 to 2018 (Whelan & Kronthal-Sacco, 2019). However, these results show that consumers’ awareness has increased over the years, not necessarily that production has shifted towards more sustainable practices.
Greenwashing, the act of misleading consumers regarding the environmental practices of a company, is not new. Its use has increased over recent years to meet consumer demand for environmentally friendly goods and services. Indeed, despite greenwashing emergence dates back to the 60s, proper regulation and a specific legal framework have never been implemented. In this article we present a brief excursus regarding the path toward an effective regulation taking into consideration the main difficulties that policymakers could encounter, indicating also potential solutions. As a matter of fact, what is designed precisely to fight greenwashing has become firms’ perfect instrument to pursue it.
One of the main instruments used to understand whether a firm is effectively sustainable or is just simulating sustainable efforts are ESG (environmental, social and governance) ratings. A recent study conducted by Berg et al. (2020) underlines the significant discrepancies between the evaluations performed by different rating agencies such as Vigeo Eiris, RobecoSAM, Asset 4, KLD and Sustainalitycs, when evaluating the same firm. The reason behind this gap comes from the absence of documents featuring legal stature that universalize how this kind of assessment should be processed. The result is that ratings are not reliable. What could provide reliable information is a deep analysis of the firm under assessment (Edmans, 2020).
Another way to address this problem could be restructuring the way these ratings and certifications work, increasing both the transparency of environmental performance and the knowledge about the topic. This can be effectively done by aligning intra-firm structures, processes, and incentives. Indeed, the roles of managers and NGOs should be considered critical to reducing greenwashing in the current regulatory context.
Until there is no legal framework assessing matters such as greenwashing, ill-intentioned firms will systematically find a way to present their productive activities under a more appealing guise for the public.
Green Bond, for instance, serves as a clear example of this phenomenon: introduced in 2007, this financial tool still does not figure in any law provision nor code, giving a rich opportunity to many countries and corporations to crowd in funding that will only apparently be channeled into sustainable projects, when in reality, the true nature of their investments shows to be far from green. No wonder that, between 2016 and 2020, China managed to sell financial tools defined “green bond” that were only partly aligned with the international environmental, non-legal, standards (Yamaguchi & Taqi, 2020).
To provide the reader with a better understanding of the problem, we can draw the following conclusions: first, it is clear that, as stated by Delmas et al. (2011), enforced regulation is the most effective means to address the problem of greenwashing. An important step has been done by the EU Commission with the creation of the Sustainable Taxonomy Regulation in 2020, but testing its effectiveness is a long run. In the meanwhile, the role of managers and CEOs could be pivotal in increasing transparency and transform the companies’ business model. Independent certifications could also play a fundamental role in encouraging companies to adopt transformative changes. This could be done by tailoring the prices of the above-mentioned certificates according to the specific business models and impact of the companies. Driven by the desire to cut costs, firms could be enticed to make changes so as to comply with the parameters of a desirable legal framework on the subject. Indeed, we all know that what truly drives change for firms, is generally profit. All this being said, it is evident that further research in this direction is needed.
This article has been written by the students of the Luiss new Msc in Law, Digital Innovation and Sustainability in the context of the class of Law and Policy of Innovation and Sustainability taught by Professor Christian Iaione. The cluster “Earth” is composed of the following students: Alessandro Ciro Cimmino, Chiara Fusari, Margherita Frabetti, Giannandrea Ingallinera and Omolola Akinniyi
BIBLIOGRAPHY
Whelan, T. and Kronthal-Sacco, R., 2019, Research: Actually, consumers do buy sustainable products, Harvard Business Review.
Berg, F., Koelbel, J.F. and Rigobon, R., 2020, Aggregate confusion: the divergence of ESG ratings, Available at SSRN 3438533.
Delmas, M.A. and Burbano, V.C., 2011, The drivers of greenwashing, California management review, 54(1), pp.64-87.
WEB REFERENCES
https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en
https://www.growthepie.net/the-inconsistency-of-esg-ratings/
https://www.spglobal.com/marketintelligence/en/news-insights/blog/banking-essentials-newsletter-november-edition