In honour of Earth Day, we're doing a deep-dive Q&A feature on the confusing world of greenwashing with Dr. Elizabeth Demers. Demers is the Deloitte Professor at the School of Accounting and Finance (SAF) and Co-Director of the CPA Ontario Centre for Sustainability Reporting and Performance Management. Her work on ESG issues has been featured in global news media and referenced in deliberations by the U.S. Securities and Exchange Commission, underscoring the real-world impact of her research. She also serves on CPA Ontario’s Sustainability Strategic Advisory Committee. At the heart of her work is a focus on how non-financial information, such as ESG scores and sustainability-related disclosures, can be used to assess and predict firm performance, and how disclosure and communication practices shape firm value, information asymmetry and the cost of capital. Read along as Demers helps us navigate these increasingly important environmental issues.
Q: What is greenwashing and why is it a significant issue today?
From my perspective, greenwashing is the practice where a company either overstates its environmental credentials or highlights only its positive actions while omitting the negative. The latter is a “lie by omission” that misleads stakeholders about the firm’s overall environmental performance. This is the more common form of greenwashing because typically you can’t outright lie in the corporate world, so corporate communications are more subtle than that.
Q: How common is greenwashing in sustainability reporting, and how can we reliably measure its extent?
Reliably measuring greenwashing on a large scale is challenging as determining whether something is greenwashing is inherently subjective and thus not easily captured by algorithms. Experts still aren’t sure how to measure it and may have differences of opinion about the same company’s reporting. We think we know it when we see it, but you really need a lot of insights into a particular company to know when they’re omitting something or only exaggerating the positives.
Q: How do legislative actions like Bill C-59 and high-profile cases like the one against Lululemon affect greenwashing practices?
Bill C-59 is a new piece of legislation and a part of it relates to greenwashing. It was designed so the government can enable regulatory action against a company that is alleged to be engaging in greenwashing. For example, Stand.earth filed a complaint against Lululemon for exaggerating their environmental friendliness, a case that serves as a high-profile warning to other would-be greenwashers. While Bill C-59 should be helpful in curtailing corporate greenwashing behaviour in Canada, concerns have been expressed that it is leading some companies to significantly reduce their environmental disclosures—a phenomenon referred to as “greenhushing.”
Q: What kinds of risks do companies face—financial or reputational—when they make misleading environmental claims?
When you engage in greenwashing, you destroy trust in your company. When it’s revealed that you’re engaging in this behaviour, you alienate the stakeholders who really care about sustainability. You can also damage your relationship with your employees and struggle to attract the best employees going forward. With human capital being increasingly more important to value creation in the corporate world, this can heavily impact innovation and ultimately profitability. This process of alienation also works for customers; those who are attracted to your initial environmental messaging will be disappointed by the hypocrisy when greenwashing is revealed, potentially leading to boycotting and further damage to the firm’s revenue streams. These controversies are tracked by ESG rating agencies so they may spill into the financial markets as the company’s ESG scores, leading to lower demand for the firm’s stock from sustainability indices and other sustainable investors. Basically, greenwashers run the risk of melting away the firm’s value as they destroy their credibility, reputation, and relationships with key stakeholders.
Q: What are ESG summary scores and what limitations do they have?
ESG scores combine environmental, social and governance factors into one summary metric intended to indicate a company’s overall performance. To be honest, lumping these diverse dimensions together is problematic because their importance varies significantly by industry. They probably shouldn’t have been added together in the first place as they can often average out and can obscure the actual environmental impact of the company. Additionally, many ESG scores often focus more on disclosure than on actual impact, allowing the largest carbon emitters, like some of Canada’s own major banks, to continue to flourish, while the lack of consistency among different rating agencies raises doubts about the general reliability of these ratings. It is questionable whether they are fully fit for purpose.
Q: Should we overhaul the current ESG model and would global sustainability reporting standards make a difference?
I believe that we should drop the acronym ESG altogether as it encourages you to lump all of these factors together. The industry itself is actually moving away from this term in favour of “corporate sustainability,” which better encapsulates the long-term, multifaceted (social and) environmental impact of a company. Overall, we need more consistent reporting, a common set of standards akin to those used in financial reporting —like International Financial Reporting Standards (IFRS)—to ensure companies report reliably and comparably. We now have the International Sustainability Standards Board (ISSB) which shows promising steps toward establishing that global baseline. With the course we’re on today, we need a big push in the right direction with regulation.
Q: What practical advice would you give to everyday consumers trying to distinguish genuine sustainability efforts from greenwashing?
Hopefully with Bill C-59, some of this responsibility will be alleviated from the consumer, but I would still suggest everyone conduct their own simple due diligence. Visit a company’s website and don’t just look for the good statements. Think about what the problems might be with the product or industry. Consider the product’s entire supply chain and seek out independent or third-party certifications. A brand like Tony’s Chocolonely, for example, does a great job at certifying that their products are as free as possible from the common industry issues of rain forest destruction and child and slave labour abuses. So, it requires an effort to do that but for responsible people on the planet it's the way we should be doing things. It doesn't require a degree in sustainability to be a responsible consumer, and we all need to get there.