Greenwashing is not new, it’s false advertising

Investment industry can learn from other industries, where there is more guidance about what is misleading

Chris Fidler senior director in the CFA Institute’s global industry standards team


Chris Fidler, head, global industry standards, CFA Institute

Greenwashing has been characterised across a broad spectrum: from hypocrisy to fraud and everything in between. It’s important to conceptualise greenwashing appropriately and accurately because it influences what we do about it.

The original conception of greenwashing is that of a company that tries to make consumers believe it cares about the environment, when in fact, its products and operations hurt the environment and it only cares about the bottom line. The often-repeated example of greenwashing is the sign at the hotel that asks guest to reuse their towels and sheets. The hotel is guilty of greenwashing because it wants us to think it cares about the environment, when in fact, laundering fewer linens reduces the hotel’s operating costs, and the power and water savings are small compared with the overall negative environmental impact of the hotel’s operations.

This characterisation of greenwashing is not very helpful for identifying bad actors or bad practices because it sets the bar too low. Most companies want consumers to believe they care about the environment, and most companies generally put profits ahead of environmental concerns, and virtually all companies cause harm to the environment in some way and to some extent. 

These facts make it easy to cherry pick some inconsistency in a company’s statements or actions and then level an allegation that is largely interpreted as fraud in the court of public opinion, which is also why many people perceive greenwashing to be a serious, widespread problem.

Regulators have the tools

However, a more practical way to think about greenwashing has emerged, and that is as advertising or disclosures that contain false or misleading information about a product’s environmental characteristics or impacts.

Characterising greenwashing as a form of false advertising is useful for several reasons. First, it raises the bar for allegations of greenwashing. One has to prove that a statement or claim made by a company is false or misleading; it’s not enough to simply point out inconsistent behaviour. 

Second, it removes the question of intent. A statement or claim can be misleading even if the company doesn’t intend it to be misleading. 

Third, it means that regulators already have the tools they need to address greenwashing. 

False and misleading advertising comes in many forms, such as unsubstantiated claims, omissions, false comparison, manipulation of key terms, and selling a product that fails to deliver the promised benefits. 

When we get to this level of precision, it is possible to start making empirical observations about the prevalence and severity of potentially misleading environmental claims. We don’t have a lot of data at this point, but financial regulators and organisations like CFA Institute are conducting research.

An old problem

Judging by regulatory enforcement actions to date, it seems that one of the more common forms of false advertising is a failure to execute an investment process as it is disclosed in regulatory documents and advertising materials.  

For example, a regulator found that an ESG quality score was not used in all investment decisions when the product disclosures said it would be. While this failure was characterised as an example of greenwashing, it likely would not have been if the failure had been the inconsistent use of an earnings quality score instead of an ESG quality score.

This is an important insight because it shows greenwashing isn’t really a new problem. It’s more of a new twist on an old problem. Additionally, it’s notable that the regulator used long-standing advertising rules to bring the enforcement action. New greenwashing regulation was not needed. 

Advertisement of environmental claims is a relatively recent phenomenon in the investment industry, and there is still much work to be done to understand the nature of the claims, how those claims are being advertised, and which sorts of advertisements are misleading. 

The investment industry can learn from other industries, where there is more experience with environmental claims and more guidance about what is misleading. Also, financial regulators can look to previous efforts that were successful in mitigating other types of false advertising, for example claims about investment performance. When we see greenwashing simply as a form of false advertising, both the problem and the solutions become clearer.


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