What is Greenwashing? Why Do Sustainability Claims Need Regulation and Transparency?

Introduction 

As climate change intensifies and environmental awareness grows, companies are under pressure to demonstrate their commitment to sustainability. Terms like “carbon neutral” and “eco-friendly” now fill product labels and marketing campaigns, promising that brands are taking steps to protect the planet. However, these claims are often exaggerated or misleading—a tactic known as greenwashing. Greenwashing deceives consumers into believing that a company is environmentally responsible when, in reality, its impact may be much less eco-friendly than advertised. Greenwashing has garnered increased scrutiny, prompting regulatory action and raising the stakes for businesses that make unverified claims.

What is Greenwashing?

Greenwashing refers to the practice of making deceptive claims about the environmental benefits of a product, service, or brand. These claims might involve vague terms like “eco,” “sustainable,” or “climate-friendly” without providing verifiable data to back them up.[1] Such language misleads consumers, who are often willing to pay more for brands they perceive as green. Companies engaging in greenwashing gain short-term consumer trust but risk damaging their reputation if they’re found to lack genuine sustainability practices.

The motivations behind greenwashing are multifaceted. The demand for sustainable products, combined with a lack of standardized regulations, makes it easy for companies to make unverified claims. Some greenwashing is also unintentional, resulting from supply chain complexities or insufficient oversight.[2] Nonetheless, whether deliberate or accidental, greenwashing undermines real environmental progress and misleads stakeholders.

Greenwashing in Action: High-Profile Cases

The impact of greenwashing becomes clear through several prominent examples across various industries. These cases demonstrate the risks companies face when they prioritize image over authenticity.

1. DWS Group and Deutsche Bank’s ESG Scandal: DWS Group, a subsidiary of Deutsche Bank, marketed its investment products as environmentally and socially responsible, claiming a strong commitment to ESG (Environmental, Social, and Governance) principles. However, investigations in 2022 revealed that DWS had not adequately integrated ESG factors into its investment decisions.[3] Following a police raid on its offices, DWS faced lawsuits and a 23% drop in profits, illustrating the financial consequences of misrepresenting ESG credentials.
2. Samsung and Unrealized Renewable Energy Claims: Samsung Electronics faced criticism for its promise to transition to 100% renewable energy in key operations by 2020. However, investigations revealed that this target had only been partially met, and the company continued to support coal-powered projects.[4] Samsung’s failure to deliver on its renewable promises has since raised skepticism about its commitment to environmental responsibility.
3. Volkswagen’s Diesel Emissions Scandal: In one of the most infamous cases, Volkswagen falsely marketed its diesel vehicles as “clean,” while installing software that allowed them to pass emissions tests despite emitting pollutants well above legal limits.[5] Known as “Dieselgate,” this scandal cost Volkswagen billions in fines, legal fees, and lost consumer trust. The case emphasizes the consequences of greenwashing on a company’s brand and bottom line, especially when regulatory bodies hold firms accountable.
4. Danimer Scientific and Misleading Bioplastic Claims: Danimer Scientific, a company specializing in bioplastics, promoted its products as fully biodegradable. However, evidence showed that its plastics did not break down as claimed, leading to a stock price drop and investor lawsuits.[6] Danimer’s case underscores the importance of scientific verification when promoting sustainable innovations, as consumers increasingly scrutinize green claims.

These landmark cases highlight the risks, both financial and reputational, of making unverified or exaggerated sustainability claims. Beyond fines, companies risk eroding consumer trust, which can be hard to regain.

Emerging Regulatory Frameworks to Combat Greenwashing

In response to greenwashing’s rise, governments and regulatory bodies worldwide are creating stricter standards for sustainability claims.

1. European Union (EU): The EU has been proactive in curbing greenwashing with several new regulations:

• Green Claims Directive (GCD) requires companies to provide evidence for claims like “climate-neutral” or “100% recycled materials.” The directive is designed to prevent vague language and set clear guidelines for green claims.[7]
• Corporate Sustainability Reporting Directive (CSRD) mandates that large companies disclose environmental data, allowing for greater transparency and easier verification of sustainability claims.[8]
• Unfair Commercial Practices Directive (UCPD) prohibits misleading advertising and deceptive green claims, aiming to protect consumers from exploitation.[9]

2. United Kingdom (UK): The UK’s Advertising Standards Authority (ASA) and Competition and Markets Authority (CMA) now enforce the Green Claims Code, which mandates accurate, verifiable, and comprehensive claims.[10] Under the Green Claims Code, the CMA can impose fines of up to 10% of global revenue for non-compliance, encouraging companies to avoid misleading claims.

3. United States (US): In the US, the Federal Trade Commission (FTC) provides guidelines on environmental marketing claims through its Green Guides, which cover terms like “recyclable” and “carbon neutral.”[11] Recently, the Securities and Exchange Commission (SEC) proposed new ESG disclosure requirements for public companies to improve transparency and protect investors from misleading claims.[12]

4. India: The Indian consumer rights watchdog, Central Consumer Protection Authority (CCPA), has released the draft Guidelines for the Prevention and Regulation of Greenwashing, 2024 for public comments. Aimed at curbing unsubstantiated environmental claims, the Guidelines define greenwashing in the context of environmental claims. Companies must substantiate claims like "eco-friendly," "green," and "sustainable" with verifiable disclosures.[13] Independent third-party verification is mandated for complex claims such as "carbon neutral." Penalties for non-compliance are strict, with fines up to INR 50,00,000 and potential imprisonment for repeated violations.

How can Companies avoid Greenwashing?

To maintain trust and comply with evolving regulations, companies must adopt best practices for sustainability communication. Here are several strategies to avoid greenwashing:

1. Transparency in the Supply Chain: Companies should ensure a clear chain of custody, documenting environmental impact from sourcing to disposal. Tools like Digital Product Passports (DPPs) can help provide verifiable information on a product’s lifecycle.[14]
2. Independent Verification and Data-Driven Claims: Audits and Life Cycle Assessments (LCAs) allow companies to back their claims with data. Third-party verification increases credibility and aligns with regulatory expectations, as seen with the EU’s Product Environmental Footprint (PEF) guidelines.[15]
3. Stay Informed on Regulations: Keeping up with changes in global standards helps companies adjust their policies to minimize legal risks. Adapting to frameworks like the EU’s Green Claims Directive or the UK’s Green Claims Code can prevent costly regulatory breaches.
4. Train Marketing Teams: Educating marketing and communications staff on sustainability definitions and standards reduces the risk of unintentional greenwashing and ensures accurate communication with consumers.
5. Foster Transparency and Accountability: Collaborating with suppliers and stakeholders helps ensure that sustainability data is comprehensive and that all actors within the value chain meet similar standards. Clear, specific claims backed by scientific evidence build trust and differentiate genuinely sustainable companies from greenwashers.

Conclusion

As consumers, investors, and regulators demand greater transparency in environmental claims, companies must adapt to this new era of accountability. Greenwashing may attract short-term attention, but it comes with significant risks, from legal repercussions to brand damage. By focusing on data-driven claims, third-party verification, and transparent communication, companies can navigate the increasingly regulated landscape and genuinely contribute to sustainable practices.

This new wave of regulation aims to promote honest, evidence-based claims that empower consumers and safeguard the environment. Companies that proactively adopt these standards will not only avoid the pitfalls of greenwashing but also strengthen their brand and stand out in a marketplace that values true sustainability.

[1] TerraChoice. "The Six Sins of Greenwashing." 2007

[2] Lyon, T. P., & Montgomery, A. W. (2015). "The Means and End of Greenwash." Organization & Environment, 28(2), 223–249.

[3] Reuters. "DWS’s Profits Slide Amid Greenwashing Allegations." May 2022.

[4] Samsung Sustainability Report. "2020 Environmental Responsibility and Renewable Energy Commitment." 2020.

[5] BBC News. "Volkswagen Emissions Scandal: What You Need to Know." 2015.

[6] Wall Street Journal. "Danimer Scientific's Biodegradable Plastic Claims Under Scrutiny." 2021

[7] European Commission. "Green Claims Directive Proposal." 2021

[8] European Commission. "Corporate Sustainability Reporting Directive." 2021.

[9] European Union Law. "Directive 2005/29/EC on Unfair Commercial Practices." 2005

[10] Competition and Markets Authority (UK). "Green Claims Code: Making Environmental Claims Clear and Accurate." 2021

[11] Federal Trade Commission. "Green Guides: Environmental Marketing Claims" 2020.

[12] Securities and Exchange Commission. "Enhanced ESG Disclosures Proposal" 2022.

[13] Central Consumer Protection Authority. "Draft Guidelines for the Prevention and Regulation of Greenwashing, 2024" 2023.

[14] Digital Product Passport Initiative, European Commission. "What is a Digital Product Passport?" 2023.

[15] European Commission. "Product Environmental Footprint Initiative." 2020.