What Consumers and Businesses Need To Know About Greenwashing

Greenwashing involves exaggerating or misrepresenting environmental credentials to appeal to consumers. It poses a significant risk to businesses, as it can damage their reputation, erode consumer trust, lead to legal penalties, increase costs, and cause employee dissatisfaction. Consumers play a crucial role in preventing businesses from greenwashing because they have the power to influence the market demand for products and services that are genuinely environmentally friendly.

From eco-friendly packaging to carbon offsetting programs, companies also use sustainability as a marketing tool. Behind the buzzwords and glossy ads, however, lies the murky world of “greenwashing,” where companies overstate or misrepresent their environmental credentials to appeal to consumers. Some companies use this practice to capitalize on the increasing demand for environmentally friendly products without making significant efforts toward sustainability.

Case in point: A recent report showed that at least 66% of consumers are willing to pay more for products from brands that care about the environment, and this percentage is even higher (73%) among young people.

However, a study conducted in Europe revealed that 42% of environmental claims made by companies were either deceptive, false, or overstated, indicating a significant occurrence of greenwashing on an industrial level. This poses a risky situation for businesses.

Fast-fashion brands often promote their green initiatives. H&M, for instance, launched a “green” clothing line called “Conscious,” claiming to use organic cotton and recycled polyester. However, the line was found to be a mere marketing ploy to make the company appear more eco-friendly. The Norwegian Customer Authority criticized H&M for the misleading marketing of the Conscious Collection, as there is no clear definition for terms like “sustainable” or “green.” The authority found that H&M's sustainability information was insufficient, given the Conscious Collection’s advertised environmental benefits.

Impact of greenwashing on a company’s bottom line

Greenwashing might initially boost a company's profits by misleading consumers into buying their products or services, but in the long run, the negative consequences of being exposed for greenwashing can harm the company's financial performance even more.

Here are some potential consequences of greenwashing:

• Loss of consumer trust: If a company has engaged in greenwashing, it can damage the company's reputation and erode trust among consumers, investors, and other stakeholders. This, in turn, can lead to lower sales, higher costs of capital, increased regulatory scrutiny, and legal challenges. Studies have shown that customer satisfaction scores can drop by 34% when a company is perceived to be greenwashing.

Legal penalties: Companies that engage in greenwashing may face legal penalties or fines for misleading advertising or false claims. For instance, a California federal court has given the green light to a class action settlement between Keurig Green Mountain, Inc., a coffee pod and machine maker, and Kathleen Smith, a customer who accused the company of misleading consumers about the recyclability of its coffee pods.

The settlement offers US$31 million in cash and vouchers to the customers who purchased the coffee pods from September 7, 2012 through August 14, 2020. The settlement also obliges the company to modify its labels and ads for its coffee pods to make them clearer and more honest. The court decided that the settlement was fair, reasonable, and sufficient for the customers and granted US$7.75 million in fees, costs, and an incentive award to Smith and her attorneys.

• Increased costs: If a company is found engaging in greenwashing, it may need to take steps to address the issue, such as reformulating products or changing marketing strategies. These actions can be costly and may impact the company's profitability.

Starbucks, for instance, received criticism for their use of disposable cups that are not recyclable or compostable in many locations. In response, the company has implemented various measures such as launching a reusable cup program in select markets, providing incentives for customers who bring their own cups, and experimenting with alternative cup materials that are more environmentally sustainable.

• Employee dissatisfaction: Companies that engage in greenwashing can also incur employee dissatisfaction or turnover. Employees who are passionate about sustainability may be less likely to want to work for a company that is known for deceptive environmental practices.

In 2019, Amazon initiated a “Climate Pledge” to reach net-zero carbon emissions by 2040 and to invest in renewable energy resources. Nonetheless, there were objections from critics who asserted that Amazon’s pledge was inadequate and contradicted by its business activities, including the expansion of its delivery fleet that runs on fossil fuels, hosting oil and gas firms on its cloud platform, and opposing legislation aimed at addressing climate change. Amazon also encountered resistance and protests from its employees, who urged the company to take more steps towards combating climate change and improving working conditions.

Common tactics and examples of greenwashing

Greenwashing practices can take many forms, and companies use various tactics to mislead consumers into thinking that their products or services are environmentally friendly:

• Misleading labels: Product labels that lack clear definitions for words such as “green” or “natural,” and supporting evidence to verify their environmental assertions can be problematic. Product labels are crucial for customers who desire to purchase eco-friendly products. According to a study, product labels influence almost 40% of consumers.

• False claims: This involves making false or exaggerated environmental claims about their products or services, such as claiming that a product is 100% recyclable when it contains nonrecyclable components.

• Hidden trade-offs: This can cover promoting a product’s environmental benefits while ignoring its negative environmental impact elsewhere in the supply chain or across the product’s life cycle.

• Irrelevant claims: Many companies make trivial environmental claims that are not meaningful, such as labeling a product as “ozone-friendly” when chlorofluorocarbons (CFCs) have already been banned for decades, and “non-genetically modified organisms (GMO)”. GMOs are not inherently good or bad, as they have been used for different purposes, including boosting crop productivity, increasing nutritional value, and developing medications.

An example is Hunt's tomato advertising campaign, which was criticized for using an unhelpful and deceptive claim to promote their products as “non-GMOs” when there are no GMO tomatoes on the market. Hunt’s faced backlash from consumer advocates and scientists who recognized its label as a case of greenwashing and fear mongering. Hunt’s later apologized and admitted that all tomatoes are non-GMO.

• Lack of proof or certification: Some brands make environmental claims without providing any supporting evidence or third-party certification, such as claiming that a product is “sustainably sourced” without any verification from a credible organization.

How consumers can spot greenwashing

Furthermore, consumers can avoid supporting companies that are not genuine in their environmental claims by identifying greenwashing, and instead supporting those that are truly committed to sustainability:

• Look for third-party certifications. This can provide assurance that a product or service has been thoroughly vetted for its environmental claims. Look for labels such as the Forest Stewardship Council (FSC), ENERGY STAR, or the US Department of Agriculture’s (USDA) organic certification.

• Read the fine print. Some businesses might make vague or misleading claims on their packaging or advertising. It’s essential to read the product description, website, or other sources of additional information.

• Compare products. Before making a purchase, compare the environmental claims of different products to identify inconsistencies. For example, if two products claim to be eco-friendly but only one provides specific data about its sustainability practices, it’s likely that the other product is engaging in greenwashing.

• Conduct thorough research. Look into the company’s environmental track record to gain a better understanding of its commitment to sustainability. Look for information on the company’s website or other credible sources, such as news articles or reports from environmental organizations.

Sample visualizations of an analytics-enabled solution for tracking CO2 emissions

Avoid greenwashing with data and analytics

To substantiate sustainability claims and avoid greenwashing, companies can use data and analytics. With the right capabilities in analytics, companies can examine their supply chain, energy consumption, and waste production. This enables them to pinpoint opportunities for improvement and establish feasible sustainability objectives.

Companies can also gather and scrutinize feedback from consumers to gain insight into how they perceive their environmental practices. By monitoring customer reviews online, social media references, or conducting customer surveys, companies can accordingly adjust their sustainability strategies.

Additionally, financial firms, particularly banks, can cultivate trust and loyalty among their customers by utilizing analytics for generating reports on their investment portfolios. To promote sustainable investments, the first step is to establish a clear definition of what qualifies as "green" investments, such as renewable energy and sustainable agriculture. Investments that meet this definition can then be identified and labeled accordingly.

Furthermore, companies should establish KPIs for measuring the proportion of the total investment portfolio allocated towards sustainable projects. A monitoring and reporting system can then be implemented to track progress and ensure that sustainability objectives are met. By providing clear reports on their ecological and social impact, businesses can establish accountability and transparency, which fosters greater customer loyalty and confidence.

  Read more about greenwashing in our next article.