US Acknowledges 68% of Corporate Leaders are Involved in Greenwashing Practices: ERM

Listen to this story:

• 68% of U.S. corporate leaders admit to greenwashing.
• Over half of environmental claims lack credibility.
• AI and human expertise can together tackle greenwashing.

A recent report by Environmental Resources Management (ERM) highlights a significant issue within the ESG rating market: greenwashing. According to the study, 68% of corporate leaders in the United States admit to engaging in greenwashing practices. This revelation underscores the importance of vigilance in assessing companies’ environmental claims for investors and ESG raters.

Understanding Greenwashing

Greenwashing involves making false or unverified environmental claims to mislead the public and investors. The UK Law Society defines greenwashing as “untrue or misleading statements about the environmental performance or impact of a business, product, or service.” While some cases are unintentional due to vague terms like “net zero” and “eco-friendly,” the legal consequences are equally severe.

The Associated Risks

The global surge in ESG interest has led to misleading statements, prompting new regulatory measures:

• Europe: EU Green Claims Directive, European Company Directive, Corporate Sustainability Reporting Directive, UK Sustainability Disclosure Requirements.
• U.S.: Section 5 of the Federal Trade Commission Act, SEC Climate Disclosures, ESG Enforcement Task Force.
• Asia: Singapore’s green labeling scheme, South Korea’s Environmental Technology and Industry Support Act, Japan’s Green Claims Guidelines.

The report highlights Volkswagen’s 2015 scandal, where the company paid over $20 billion in fines for manipulating emissions data, as a prominent example of greenwashing’s severe repercussions.

The Stakes for ESG Raters

ERM emphasizes the crucial role of ESG raters in identifying greenwashing. They must provide accurate assessments by:

1. Assessing Corporate Performance: Ensuring claims are scrutinized and evaluated for accuracy.
2. Investment Decision-Making: Offering reliable information to align portfolios with sustainable companies.
3. Promoting Accountability and Transparency: Encouraging companies to improve performance and maintain investor trust.

Identifying Greenwashing

ERM outlines several methods ESG raters use to detect greenwashing, despite inherent limitations. Advanced technologies like Natural Language Processing (NLP) assist in identifying and evaluating greenwashing through text analysis and sentiment detection. However, AI alone cannot fully address the issue due to its limitations in context and evidence, necessitating human oversight.

Related Article: Australia Fines Mercer Superannuation $7.4 Million in Landmark Greenwashing Case

AI and Human Expertise: A Powerful Team

ERM suggests that combining AI with human expertise offers promising opportunities to tackle greenwashing. AI can help identify language patterns and anomalies, while human judgment ensures a comprehensive understanding of ESG risks. This combined approach can enhance the accuracy and transparency of greenwashing assessments, protecting investors from regulatory, financial, and reputational risks.

ERM’s report highlights the critical need for accurate ESG ratings and underscores the importance of integrating greenwashing risks into assessments. By leveraging AI and human expertise, ESG raters can better detect and mitigate greenwashing, ensuring that investors receive reliable information for their sustainable investment decisions.