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Corvinus Research: 7 percent of companies in the world used greenwashing at least once

2024-05-16 17:43:00

There are a number of professional solutions to reduce greenwashing, but they are not much used, said Edina Berlinger, professor at Corvinus University, an expert on the subject.
Budapesti Corvinus Egyetem

Globally, environmental crime is the fourth major form of crime, growing year on year. One form of environmental abuse, greenwashing, has already occurred in 7 percent of the studied companies, i.e. when companies that harm the environment present themselves to the outside world as environmentally friendly.  

Previous green communication should be considered as an aggravating circumstance in cases of environmental crimes – this would make sense not only from a legal point of view, but also from an economic one. It is tempting for companies, as it is easier and cheaper to communicate green than to innovate and act green, while the market rewards companies that look green, said Edina Berlinger, professor at Corvinus University, researcher at the University of Luxembourg, expert in sustainable finance. The Hungarian Economic Association event “Is it really green? Fresh research on greenwashing” on 8 May focused on a specific case of environmental abuse. 

The speaker began by pointing out that there is currently no generally accepted legal definition of greenwashing, which makes it more difficult to fight it. It means that a company uses communication to create a false impression of itself, its activities and its products as if it were really green, which harms consumers, investors and, ultimately, society as a whole. The greater the difference between what a company actually does and what it presents itself as, the more it can be called greenwashing. 

Corporate monitoring and the environmentally aware consumer can also help to combat greenwashing 

Berlinger presented their joint research with co-authors Zsolt Bihary, Barbara Dömötör, Judit Lilla Keresztúri, Ágnes Lublóy, Martin Márkus and Gábor Neszveda. In one of these, more than 1200 companies from 23 developed countries were examined between 2008 and 2020. The results show that 7% of companies have already been involved in greenwashing at least once. This is 40 percent in the energy sector, 28 percent in utilities and 10 percent in energy-intensive industries such as chemicals and construction materials. The reason why the energy sector is so prominent is that it is easy to find out if they are polluting the environment, as they are big companies that attract a lot of media attention. The sector is also very capital-intensive, so companies are trying their best to raise funds. 

According to another study, companies that are larger, have higher profits and return on assets, fewer independent directors on their boards, less liquid trading in their shares and operate in a country where consumers are less environmentally conscious, are more likely to be greenwashing. However, greenwashing is counteracted if a company has a strong internal control system, so monitoring plays a big role. 

Why are companies even starting to greenwash? The presenter mentioned three aspects: they can do it, because the regulation allows it, there is the motivation to do it, because it can be used to make extra profit, and  self-deception and the “I’m only doing good, besides, others are doing it too” mentality also play a role. In any case, the cost of green communication is lower than the cost of real green innovation. According to the presenter, artificial intelligence will play an increasingly important role in identifying cases of greenwashing. 

 

Global environmental crime increases by 5-7 percent per year 

According to Edina Berlinger, environmental crimes (pollution and serious damage to biodiversity) are the 4th most common global crime. This form of crime is growing by 5-7% per year, and comes  behind drug trafficking, arms trafficking and human trafficking. In 2024, a new EU directive was adopted. The related sanctions are significant maximum penalties: 10 years in prison, 5 percent of turnover or €40 million. Examples of aggravating circumstances include death or serious injury as a result of the incident, misleading company documents on the subject, recurring pollution in the company, or the company profiting from the environmental crime. The expert reminded the audience of the British Petrol (BP) oil spill in the Gulf of Mexico in 2010, which showed that the company was able to reduce the major loss of revenue caused by the consumer boycott by using greenwashing advertising. 

According to Berlinger, from both a legal and an administrative point of view, it would be logical that if the company presented itself greener than it really was before the damage occurred, then the penalty should be heavier. Likewise, if we want to promote green investment, we should not only give a discount to firms that do so, but also increase the penalty rate proportionately if greening is not achieved.  

  

You also need to look behind the ESG assessments 

The speaker pointed out that the ESG (Environmental, Social, Governance) assessment can also be used for greenwashing, where companies  report on their environmental, social and governance risks and opportunities. A good example is the case of Credit Suisse, where a series of scandals followed each other, but the bank tried to justify its actions to shareholders in its ESG reports. And because the methodologies used to assess ESG reports differ significantly, it has happened that a bank has received both the highest ESG rating from one international organisation and the riskiest rating from another. In any case, research shows that just a one grade higher ESG rating reduces the severity of damage by 50-60 percent. At the same time, several US states have already passed some kind of anti-ESG legislation, which means that you cannot invest only on an ESG basis because it can be misleading or destroy value.  

The expert also outlined the theoretical framework for why a group of green, greenwashing and brownwashing (i.e. doing green but not communicating it) and honest brown (doing environmental damage and not denying it) companies can coexist at all. Unequal knowledge between investors and firms and the resulting counter-selection, as well as moral hazard, also play a role. The first is that investors offering green loans at preferential rates often do not know how much the company they are lending to will get out of the green project they are planning, or even how much the company actually wants to implement it. The latter depends on whether the loan is actually used to implement the green project, whether the positive external impacts are realised, or whether they do something else and just label it as an environmental investment.  

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GEN.:2024.05.28. - 04:56:42