Greenwashing -Tool for More Revenue?
This form of misleading environmental claims in favor of marketing a product is known as greenwashing. [1]
Even more than a year after the introduction of the Disclosure Regulation, greenwashing remains a recurring problem that affects not only impact investments, but the entire sustainable investment universe. In the financial industry, greenwashing is the deliberately misleading or unsubstantiated promotion of a financial product as sustainable. The aim is to mislead investors about the true sustainability performance of the product and to promote it as more sustainable than it actually is (cf Morningstar).[2]
Defintion of Greenwashing
The European Commission defines greenwashing as an activity that helps any product gain an unfair competitive advantage through misleading marketing. Greenwashing is defined as such when the product is deliberately described with attributes such as "green", "ecological", or "responsible" in order to generate a more sustainable or environmentally friendly image of the product. This is done despite not meeting basic sustainability standards. [3]
The nature and methods of greenwashing vary. For example, greenwashing can be carried out by making false claims, but also by means of exaggeration, euphemism, irrelevant statements and descriptions that are deliberately vague and ambiguous (cf. UL) [4]. In view of the absence of a uniform definition of sustainability, accusations of greenwashing can also stem from the collision of different understandings of the concept of sustainability (cf. morningstar)[5].
Why is greenwashing being done?
In general, deliberate greenwashing aims at sales advantages. These are mostly based on the public image created by the "green" product. Companies and institutes have to respond to the needs of their customers and the competition. And these are now: environmentally friendly, recyclable and as plastic-free as possible. Although sustainable products emerged from these needs, greenwashing also developed. Consumers purchase products with a better conscience. The purchase decision is therefore positively influenced, so that the purchase is legitimized with a good feeling. Sales figures can be increased considerably in this way. In addition, the price of the product can be set higher. Customers are often willing to pay a higher price for a supposedly sustainable product. Here, the decision is also made on the basis of personal conscience and influenced by greenwashing. In both cases, more profits are generated. But deliberately and with false statements greenwashing can be a form of misleading advertising and is under certain circumstances justiciable (cf. Osborne Clarke). [6]
It is not always possible for customers to verify in individual cases whether a product is actually as sustainable as advertised, which makes it difficult to distinguish between genuine and supposed sustainable investments. As a result, there is a risk that negative cases will undermine the credibility of sustainable investment strategies and that ecologically and socially oriented investors will withdraw from the market due to a lack of trust. Against this background, Mike Judith, international head of sales at Norwegian asset manager DNB Asset Management, warns:
"Greenwashing is damaging the serious sustainable segment." (cf. Tagesspiegel Background) [7]
Conclusion
In summary, it is striking that greenwashing is a common phenomenon in the marketing of various (financial) products. Whether out of ignorance or as a targeted instrument to increase the attractiveness of a product. In order to prevent both active, conscious and passive, unconscious greenwashing, more concrete definitions and a clear legal framework specifying the correct use of the relevant attributes are needed. In addition, there is a need for widespread training at the advisory level. Knowledge gaps can be filled through training courses. The danger of unconscious greenwashing could thus be significantly minimized. Furthermore, a new level with an ethical background is tangentially affected, whereby conscious, targeted greenwashing can also be minimized.
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[1] https://ec.europa.eu/environment/eussd/pdf/green_claims/de.pdf
[3] https://www.emissions-euets.com/carbon-market-glossary/2125-greenwashing
[4] https://www.ul.com/insights/sins-greenwashing
[6] https://www.osborneclarke.com/de/insights/greenwashing-der-werbung
[7] https://background.tagesspiegel.de/sustainable-finance/darum-ist-greenwashing-ein-problem