“Misleading green corporate communication should be punished more; this would make sense not only from a legal point of view but also from an economic one,” commented Edina Berlinger, a professor at Corvinus University, researcher at the University of Luxembourg, and expert in sustainable finance.

“It [greenwashing] 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,” she added.

She was speaking at a Hungarian Economic Association event, “Is it Really Green? Fresh Research on Greenwashing,” held in May, which focused on a specific case of environmental abuse.

Berlinger began by pointing out that there is currently no generally accepted legal definition for greenwashing, which makes it more challenging to fight. Typically, it is taken to mean a company that uses communication to create the false impression that its activities or products are green when they are not.

This harms consumers, investors and, ultimately, society as a whole. The more significant the difference between what a company actually does and what it says it does, the more it can be called greenwashing.

Berlinger presented her joint research with co-authors Zsolt Bihary, Barbara Dömötör, Judit Lilla Keresztúri, Ágnes Lublóy, Martin Márkus and Gábor Neszveda. In one of their studies, more than 1,200 companies from 23 developed countries were examined between 2008 and 2020.

The team found that, overall, 7% of firms have already been involved in greenwashing at least once. This ratio rises to 40% in the energy sector, 28% among utilities and 10% in energy-intensive industries such as chemicals and construction materials.

Plenty of Attention

According to the researchers, the energy sector is so prominent because it is easier to find out if its players are polluting the environment; the companies are bigger and tend to have capital-heavy projects that require more investments, raising the level of scrutiny.

Another study highlights that companies that are larger, have higher profits and returns on their 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 prone to greenwashing. However, the practice can be counteracted if a business has a robust internal control system, so monitoring plays a significant role.

Why are companies even tempted to greenwash? Berlinger mentioned various motivations: because the regulations allow it, because it can help generate extra profits, and self-deception: “I’m only doing what everyone else is doing.”

In all cases, the cost of greenwashing communication is markedly lower than that of genuine green innovation. According to the professor, AI will be increasingly important in identifying cases.

The researcher says environmental crimes are the fourth most common globally. Worse, it is growing by 5-7% per year and trails only drug, arms, and human trafficking.

In 2024, a new EU directive was adopted. The related sanctions include significant maximum penalties: 10 years in prison, fines of 5% of turnover or EUR 40 million. Aggravating circumstances include death or severe injury due to an incident, misleading company documents, recurring pollution events, or a company profiting from environmental crimes.

The expert reminded the audience of the British Petrol (BP) oil spill in the Gulf of Mexico in 2010 and said that the company had been able to reduce a significant loss of revenue caused by a consumer boycott by using what she called greenwashing advertising.

The Polluter Pays

In Berlinger’s opinion, from both a legal and an administrative point of view, it would be logical that should a company present itself as greener than the reality, the penalty for causing damage should be heavier.

Likewise, if we want to promote green investments, we should not only offer discounts to firms that launch environmentally beneficial projects but also proportionately increase the penalties if the promised greening is not achieved. 

The ESG phenomenon can also be used for greenwashing, Berlinger warned. A good example is the case of Credit Suisse, where a series of scandals followed one another, but the bank tried to justify its actions to shareholders in its ESG reports.

Muddying the waters even more, because the methodologies used to assess ESG reports differ significantly, it has happened that the same bank has received both the highest ESG rating from one international organization and the riskiest rating from another.

While, according to research, a one standard deviation better ESG rating typically reduces the severity of damage caused by a company by 50-60%, there is some backlash against ESG overseas. Several bills have been introduced in different, mainly Republican-controlled, U.S. states that have sought to prohibit asset managers from using ESG criteria when investing taxpayer or state money.

Berlinger also explained how a spectrum of green, greenwashing, “brownwashing” (acting green but not communicating it) and so-called “honest brown” (causing environmental damage but not denying it) companies can coexist. This situation arises due to unequal knowledge between investors and companies, leading to adverse selection and moral hazard.

Adverse selection occurs because investors offering green loans at preferential rates often don’t know how committed the company is to its green project or how effective it will be. Moral hazard refers to the uncertainty about whether the company will actually use the loan for the intended green project, whether it will achieve positive environmental impacts, or if it will misuse the loan and falsely label it as an environmental investment.

This article was first published in the Budapest Business Journal print issue of May 31, 2024.