A conversation on greenwashing
Tuesday, August 13, 2019
August 2019
A deep dive of sustainability topics with Ethic's lead data scientist
A conversation on greenwashing
Tuesdays with Travis is a collection of monthly interviews with our data science lead, Travis Korte, that explores the complexities of expressing values through data.

As consumers, investors, and workers increasingly seek out organizations attuned to environmental and social issues, it can be hard to know which companies have meaningful impact and which just have good marketing. How can we differentiate between those who do and don’t practice what they preach?

In this August edition of Tuesdays with Travis, we discuss why misleading claims to sustainability are so damaging⁠—and why we are all partially to blame.  

Comments have been edited and condensed for clarity.

What is greenwashing?

Greenwashing is any measure a company takes to appear more sustainable without actually doing anything meaningful. A lot of times we hear this concept come up in terms of environmental impact, but it’s a much broader tactic companies also use to appear more socially responsible or better governed.

How easy is it to tell the greenwashers from the truth-tellers when looking at the data? How can investors avoid that trap? 

That’s the name of the game. Impact is hard to measure, and we often rely on self-reported data such as company reports, codes of conduct, or other documents. We run into challenges when companies say things in these documents that they don’t follow with practice. We’re especially skeptical of cosmetic measures companies can take to make themselves seem more committed to sustainability, like whether or not they’re a signatory of a voluntary agreement. It’s not that these commitments are bad, they just don’t tell us a lot about the impacts the company is ultimately having. And we even have to be careful with internal company policies. Companies can commit to a good policy, but if we don’t see any change in downstream outcomes, we shouldn’t be too quick to congratulate. So we’re always trying to express sustainability issues in ways we can measure more rigorously, rather than just relying on how great companies say they are.

You’re implying that not all greenwashers are intentionally deceptive⁠—that sometimes their policies just aren’t effective?

You’re absolutely right, and the ESG community has a measure of responsibility for that. Sustainable investing is about putting an incentive into the market, and if we’re incentivizing the wrong things then companies get the wrong signals. You’ll see this in situations like what happened during LGBTQ Pride Month earlier this year, when a lot of companies were accused of “pinkwashing” or “rainbow capitalism”: they were marketing themselves as more LGBTQ-friendly than their internal policies or hiring practices would indicate.

The trouble is, the sustainable investing community has given companies the idea that certain cosmetic measures are appreciated⁠—if you launch a diversity campaign, your sustainability ratings are probably going to get better, regardless of whether or not the campaign actually makes your company a materially better place for marginalized people to work. Companies are just responding to the incentives we’ve created for them, so it’s important that we not reward ineffectual behavior. The sustainable investing community is great at making demands, but we need to get better at helping companies respond to those demands in impactful ways. 

For all its faults, you could argue that greenwashing raises awareness. Even if it’s not followed up with action, it’s still the first step in identifying something as important. Is that bad? 

No, of course not. Of course it’s great for companies to raise awareness about sustainability issues. But there’s always a risk of “slacktivism.” In other words, a person who might otherwise make some really substantive, meaningful change in what they buy, where they invest, or where they choose to work is instead making their decision on the basis of some company’s greenwashed marketing campaign. Take "clean coal" as an example. While it's true that there are technologies that can reduce carbon emissions from coal-fired power plants⁠—hence the "clean" marketing⁠—they're not getting to the root of the problem of our global reliance on fossil fuels. They're also not reducing emissions as much as advertised. So while investing in these technologies might feel like a productive step in fighting climate change, what it's actually doing is diverting our attention and political will away from more effective approaches. 

So is the core problem with greenwashing that it misleads people into thinking they’re having an impact? That it cheapens the value of sustainability? 

The core problem of greenwashing is that it makes it harder for us to create the impacts we’re trying to create. There’s a concept in the social sciences called Goodhart’s Law, that when a measure becomes a target, it ceases to be a good measure. As soon as we’re grading companies on some aspect of their performance, they’ll start to optimize for that particular data point, even trying to game it at the expense of larger goals. Pretty soon we’re not learning anything from our measurement.

For example, you’ve probably seen those mulched paper takeout bowls they’re starting to have at restaurants that want to seem “green.” They’re supposed to biodegrade better than ordinary plastic containers. The trouble is, it looks like most of them contain non-biodegradeable chemicals that might actually be worse for soils than the plastics they’re trying to replace. If we’re optimizing for “green”-looking containers, not only do those containers quickly cease to be a meaningful sustainability indicator, we also run the risk of losing the thread on what we actually care about, which is reducing the negative impacts of waste.  

Are there legal repercussions for greenwashing?

In some cases, yes. In the United States, the Federal Trade Commission (FTC) enforces false advertising laws, which include things like greenwashing. But there’s a lot of gray area, and it’s important to remember that these behaviors don’t have to be criminal to make our jobs hard. Your misleading marketing doesn’t have to be so misleading that the feds file a lawsuit, but if it gives the wrong impression of your company’s exposure to risk, and people make uninformed investment decisions on that basis, it’s still harmful.

Are investors aware this is a problem? Are we still getting duped by greenwashing? 

It feels like an arms race. Companies will get better at making themselves seem more sustainable, and organizations like ours will get better at filtering out marketing noise. It wasn’t long ago that Volkswagen marketed their vehicles as having low emissions despite that not being true. At the time, it would’ve been hard to catch that with the available data⁠—the investing community probably caught it at the same time that regulators did. We have to learn each time there’s a big new greenwashing incident because we want to make sure companies can’t get away with this stuff in the future.

Key Takeaways: 

  • Be wary of cosmetic measures companies can take to appear more sustainable, such as signing a voluntary agreement or implementing policies with lack of follow-through.
  • Sustainable investors have a responsibility to demand effective change, rather than reward superficial marketing campaigns; be careful what incentives you put into the marketplace. 
  • The core problem of greenwashing is that it makes it harder for us as investors, consumers, and workers to create the impacts we’re trying to create; while greater awareness of an issue is always helpful, greenwashing runs the risk of spreading “slacktivism.”

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Sources and footnotes

Travis Korte is the associate director of Sustainability Research & Data at Ethic. Previously, Travis organized civic-minded technologists at Hack for LA and advised a wide range of clients on data science, data policy, and quantitative methods. You can follow him on Twitter at @traviskorte.

Melissa Mittelman creates content at Ethic and is an alumna of Bloomberg News, where she covered private equity & deals. Melissa previously worked at Deutsche Bank, providing institutional, cross-asset sales coverage for ultra-high-net-worth investors.

Jay Lipman, a co-founder of Ethic, is driven by the need to address climate and environmental risks with the resources to which we each have unique access. He has been ranked among the Forbes 30 Under 30: Social Entrepreneurs.