The World Is Finally Cracking Down on ‘Greenwashing’

The plan to stop companies from fudging their climate goals is fundamentally flawed.

A high-voltage electricity pylon behind a plume of smoke from burning garbage, mostly plastic and textiles, at the Gioto dumpsite
James Wakibia / SOPA / Getty

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Let’s say you want to buy a T-shirt and you want your investment to be as environmentally sustainable as possible—after all, clothing production generates 8 to 10 percent of global carbon emissions. How should you research your purchase? I don’t know. But I know how you shouldn’t research it: by listening to what the companies themselves say about their sustainability.

Consider Inditex, the parent company of Zara. On its website, the company claims that it is aiming for “Net Zero Emissions” by 2040. But a recent independent analysis by the nonprofit Carbon Market Watch finds the plan “ambiguous and unsubstantiated.” (A spokesperson for Inditex said in a statement that the company is “fully committed to reaching net zero across our value chain by 2040.”) Nothing about Zara’s pledge is unique. Companies certainly talk about climate more than ever before, but a majority of that seems to be pure greenwashing: meaningless humbug about “sustainability” and “net zero” and “the Earth is our priority.” A recent report from the nonprofit CDP looking at companies around the world found that of the 4,100 that say they have “transition plans” compatible with the Paris target of keeping the planet from warming more than 1.5 degrees Celsius (or 2.7 degrees Fahrenheit), just 81 have a “credible” plan.

Greenwashing happens because companies know that a growing number of consumers and investors care about the climate, but it’s much easier to take small or symbolic actions that don’t cut into their bottom line—tiny “win-win” actions that don’t make a real difference. “If you’re spending more money to try to be a better company on the climate, your profitability may actually go down, because that might cost something,” Eric Orts, a professor at the University of Pennsylvania’s Wharton School who studies sustainability, told me.

But something is happening in the world of financial regulation that could help. Very soon, many big companies around the world will be legally required to disclose information about their emissions and how exactly they plan to hit the targets they keep announcing. Corporate climate promises, it seems, might soon have to be more than just empty words. Still, there may be limits to what can be accomplished through financial regulation, a system designed to protect investors rather than the planet.

Pushing corporations to release details about their climate risks is relatively new, but it is based on the decades-old mechanism of financial disclosures. In many countries, public companies legally have to publish annual reports about their inner workings so that investors have something to go on when deciding where to put their money. In the United States, the Securities and Exchange Commission has since the 1930s required companies to disclose information an investor might reasonably want to know about a business—these items are deemed “material,” in financial parlance, because they are material to a potential investor’s decision about whether or not to invest. A company may look like it is thriving from the outside, but it might be embroiled in a lawsuit likely to be decided against it, or it might be selling a product that is about to lose its patent protection, allowing generic imitators to undercut its prices. Without knowing these kinds of risks, investors could lose their shirts.

As the planet warms, companies are facing pressure to disclose climate information. A board backed by the G20, the group of nations that accounts for almost 90 percent of the global economy, announced on February 16 that it has reached an agreement on how companies should disclose their greenhouse-gas emissions and information about how climate change could affect their businesses, starting in January 2024. These standards will be a kind of adjunct to broader international accounting standards already used by many countries. This comes after similar moves by the EU and the SEC, which announced its intention to add climate disclosures to its remit last year. Most of these rules haven’t kicked in yet, but many will as soon as 2024.

Altogether, these moves are creating a global system of climate disclosures that will affect most of the world’s biggest corporations. Disclosing risks to the business posed by climate change is pretty clearly material to investors. A classic example of a business facing a climate risk is a company that owns a string of coastal hotels. If it tells its investors the future looks rosy without mentioning that the planet is on track for a couple of feet of sea-level rise, it is doing its investors dirty.

The rationale for demanding emissions disclosure might seem more obscure, but the basic idea is that in 2023, emissions are almost certainly material, whether companies like it or not. Companies with high emissions are already a potential problem for investors: They are likely to be hit with taxes, duties, fines, lawsuits, reputational problems, activist investors, industry-transforming regulatory shifts, and, eventually, the costs of switching over to new ways of doing business. Investors need to know how much any company is exposed to these kinds of risks.

In addition, some of these rules will call for some companies to disclose emissions for the entire supply chain and for the life of any products they may sell. According to the CDP, supply-chain emissions are, on average, more than 11 times higher than operational emissions, and conveniently ignoring these emissions is a common greenwashing tactic.

Crucially for foes of greenwashing, companies may also have to provide information about their progress toward any climate-related targets or goals they have set. That means the carbon-emissions targets already announced by two-thirds of S&P 500 companies by the end of 2020—there are likely more now—will have to be backed by data. Companies won’t be required to set goals, but if they do, they’ll have to provide information on their progress.

If this system operates as its designers envision, fact-checking any green claims made by publicly traded companies will be straightforward, and the metrics should be similar all around the world. With investors and companies alike demanding consistent metrics across jurisdictions, it will be possible to easily compare, say, a German company with a Brazilian one—so companies that operate in many countries will have only one set of figures to assemble. But the real anti-greenwashing mechanism isn’t shame; it’s the legal liability of company boards. As one legal analysis points out, in the United States, “boards that selectively or inaccurately disclose the climate risks their companies face, or that leave their climate-related goals in the form of aspirational targets and commitments … will be exposed to regulatory action and potentially significant fines and other penalties.”

The greenwashing lawsuits have already begun, but they will become more common in an era of mandatory disclosures. On February 9, the environmental-law charity ClientEarth filed a lawsuit against the individual board members of the oil giant Shell, alleging that they are mismanaging climate risk and making misleading statements about their company’s emissions targets. In an email, a spokesperson for Shell refuted ClientEarth’s accusations, saying, “We believe our climate targets are aligned with the more ambitious goal of the Paris Agreement: to limit the increase in the global average temperature to 1.5°C above pre-industrial levels.”

But there’s a built-in limitation to what can be achieved by forcing companies to come clean about their environmental sins through the mechanism of financial disclosures: These rules aren’t about whether companies are naughty or nice; they are about whether companies are likely to be profitable or unprofitable.

Unlike the SEC, the EU goes beyond considering how climate change affects companies; it requires information about how the activities of the company affect the environment and society. In finance circles, this second category of disclosures is included in the concept of “double materiality.” Maybe a potential investor doesn’t care if a company is dumping poison in the river, but the town downstream definitely cares—it is material as heck to them. Double materiality asserts that corporations have ethical responsibilities to entities who are not shareholders. It is radical, bucking decades of economic convention in the West.

For countries, such as the U.S., that have not yet jumped on the double-materiality bandwagon, companies still have to really worry about their environmental impact only insofar as it hits their bottom line. And if they don’t even want to disclose that, they could simply decide to take their company private: In the U.S., if you don’t have any investors, you don’t have any responsibility to disclose. It is for this reason that Orts would prefer a U.S. system grounded in an ethic more like European double materiality—one in which all companies would have to report their environmental impacts not to the SEC but to the Environmental Protection Agency.

A system like that would have another advantage: It wouldn’t rely on investors caring about climate change. A late 2021 survey of individual U.S. investors suggested that people who invest money to make money are more interested in near-term financial returns than in saving the world. And major asset managers at firms such as BlackRock and Vanguard recently reassured critics that despite their own fine words about sustainability, they have no plans to stop investing in fossil fuels. This is perhaps the ultimate argument against trying to kill greenwashing through the financial system: Investors may not mind a bit of greenwashing, as long as it comes with plenty of green.