Greenwashing: A Game of Deceiving the Green Consumers
Aryan Dash & Rishita Sinha
4th Year, B.A. LL.B. (Hons.), NLU Odisha
The corporate industry has taken a negotiation where they win all the stakes. It is not foul to say that instead of societal or environmental well-being, it is the sheer self-interest of corporations which have led to the search for a green tag in society. But why is that? Singh and Joshi’s 2009 research findings suggest a positive relation between a company’s environmental disclosures and its profit margins. This finding supports the notion that the corporate pursuit of a green image is motivated by the expectation of financial gains. In a study by Robert and Katherine, the researchers elaborated that there lies a weak association between environmental disclosures and the actual work done for society arguing that without any external monitoring, companies exercise subjective judgment and present themselves to be environmentally responsible even when they lack in efforts.
ESG reports serve as a means for organizations to showcase their corporate governance, social responsibility, and environmental performance, typically released periodically through self-publication. However, the absence of standardized formats, metrics, and stringent regulations often leads to a situation where these reports may not accurately reflect the actual figures. This lack of transparency creates a potential for misleading claims, presenting the organization as more sustainable and ethical than it truly is, a practice commonly known as Greenwashing.
An illustrative instance could be cited with Nestle and Coca-Cola, both criticized for deceptive claims regarding their plastic water bottles being entirely recycled. Along similar lines, a study delved into the prevalence of greenwashing among Indian companies, identifying GAIL India as the leader in greenwashing within the Energy sector. Research showed that 54% of 48 sampled companies engage in greenwashing, mainly in India’s Energy and Manufacturing sectors.
This article explores the correlation between corporate governance and greenwashing, addressing liability, legal remedies, and implications.
Corporate Governance and Greenwashing
To grasp the connection between corporate governance and greenwashing, we must consider that a company’s decisions are shaped by the collective judgment of its directors, managers, and key officials, rather than autonomous decision-making capabilities.
One noteworthy observation is the inverse correlation between a company’s greenwashing score and its cross-listing status or presence on foreign exchanges. This linkage is rooted in the notion that such firms face heightened scrutiny and stringent disclosure requirements when listed internationally. The constant external monitoring and the necessity to disclose ESG information meticulously leave limited room for greenwashing practices.
Conversely, the connection between the dimensions of a company’s board and the occurrence of greenwashing is characterized by a more intricate and nuanced interplay. Despite the theoretical advantage of a larger board for effective monitoring, practical challenges such as coordination errors or slow decision-making processes may arise. Studies indicate that boards beyond a size of 8 are less likely to function optimally. Similarly, the presence of independent directors emerges as a positive factor in mitigating greenwashing, as they are less constrained by internal company politics and more inclined to prioritize stakeholder interests.
A notable concern is the negligible impact of a company’s inclusion in sustainability indices on its tendency to engage in greenwashing. The recent removal of Adani Ports and Special Economic Zones (APSEZ) from the S&P Dow Jones Sustainability Index serves as a stark illustration of the gaps existing between a company’s perceived image and its actual ESG performance.
The Greenwashing Blame Game: Directors as Environmental Heroes or Scapegoats?
When a company faces charges of greenwashing, it essentially confronts allegations of false claims or misrepresentation. In such instances, determining the specific individual held liable for this misdemeanor becomes crucial. It is plausible to assert that the responsibility vested in a company’s director to safeguard the environment makes them susceptible to liability. This perspective aligns with the precedent set in M.K. Ranjitsinh v. Union of India, wherein the court emphasized the director’s specific duty, equating it in significance to other corporate responsibilities.
Additionally, judicial inclination towards prioritizing environmental protection over mere profit considerations is quite evident. This perspective was clearly underscored in Cooverjee B. Bharucha v. Excise Commissioner, Ajmer, where the court asserted that in conflicts between the right to trade and environmental preservation, the scales should tip in favor of the environment
In the global context, the recently approved provisional directive, endorsed by the European Parliament, seeks to modify Directive 2011/83/EU concerning consumer rights. This amendment assigns liability to directors, requiring commission reports to assess their role in explaining consumer rights, legal guarantees, and product durability. It also mandates the evaluation of directors’ contributions to consumer engagement in the transition to environmental sustainability.
On a contrasting note, the “UK’s Financial Services and Markets Act of 2000”, Section 90, explicitly places the responsibility for misleading claims squarely on the issuer of such claims. In direct contrast, “Singapore’s Securities and Futures Act of 2001” tackles this issue differently, Sections 253 and 254 delineate the criminal and civil liabilities of directors in matters pertaining to misleading claims.
In light of the analysis, directorial responsibility for greenwashing is evident. To address this, boards should proactively establish an Environmental Governance Code, a comprehensive document outlining policies and strategies to achieve environmental goals within the corporate governance framework.
Landscape Of Corporate Social Responsibility And ESG Reporting In India
Unraveling the Quandary of CSR and ESG
The realm of “Corporate Social Responsibility (CSR)” and “Environmental, Social, and Governance (ESG)” practices in India has been under scrutiny, revealing a disconcerting trend of irresponsibility among corporate entities. Mandated by legislative amendments, companies are required to allocate 2% of their net profits from the preceding three years towards societal well-being, encompassing environmental initiatives. However, the implementation of ESG, a subset of CSR, has been marred by what seems to be a corporate culture turning noble objectives into marketing ploys. This marketing strategy i.e. ‘greenwashing,’ tends to mislead stakeholders, including consumers, and raises concerns about the authenticity of corporations’ commitment to environmental causes.
SEBI’s Regulatory Intervention: Curtailing Greenwashing in India
The Securities and Exchange Board of India (SEBI) has taken commendable steps towards rectifying the situation by attempting to standardize the reporting framework. The Business Responsibility and Sustainability Report (BRSR) framework, augmented by a circular in July 2023, now includes the value chains of the top 250 listed entities. These entities must showcase adherence to Key Performance Indicators (KPIs) related to ESG contributions. Notably, the circular mandates independent third-party verification of KPI fulfillment, serving as a potential deterrent to the prevalent greenwashing practices. With 54% of companies in the NIFTY50 index potentially engaged in such practices, SEBI’s measures may mark a turning point in fostering genuine environmental stewardship among corporations in India.
As of January 2023, the EU’s Corporate Sustainability Reporting Directive (CSRD) has reshaped corporate sustainability reporting, prompting reflections on India’s regulatory framework. While SEBI mandates third-party verifications and outlines key performance indicators (KPIs), a comparative analysis exposes gaps.
CSRD introduces two mandatory cross-cutting standards, dictating content, format, and reporting principles. Non-compliance demands company explanations. Additionally, 10 supplementary standards focus on Environment, Social, and Governance (ESG) aspects, using a double materiality test—assessing financial and impact factors. This mandates extensive due diligence by companies to identify financial and impact materiality.
SEBI’s KPIs for enhanced ESG reporting are commendable but lag behind global CSRD standards. Replicating the EU’s additional standards in India could strengthen the ESG reporting framework. CSRD’s three-pillar approach ensures thorough due diligence, and improved material information disclosure, fostering transparency in ESG reports. Aligning with these international standards would enhance India’s ESG credibility. Top of Form Top of Form
Greenwashing In Corporate Practices: Legal Implications And Solutions
In the competitive realm of corporations, the proliferation of sustainable, eco-friendly, and natural products has spawned a troubling trend of greenwashing. Seeking to establish market supremacy, companies frequently employ deceptive green marketing strategies, enticing consumers with dubious assertions about the environmental merits of their offerings.
Legal Scrutiny under the Consumer Protection Act, 2019
A recent study by the Advertising Standards Council of India (ASCI) reveals a staggering 79% of green claims made by corporations lack authenticity and are misleading. Such deceptive advertising practices fall under the purview of the Consumer Protection Act’s Section 17, categorizing them as unfair trade practices. This legal provision holds corporations accountable for misleading advertisements, safeguarding consumer interests.
ASCI’s Draft Guidelines: A Regulatory Response
Recognizing the urgency to combat deceptive green marketing, ASCI has introduced draft guidelines. These guidelines mandate that corporations substantiate their eco-friendly claims with justifications. Failure to comply not only results in financial penalties but also threatens license revocation, signaling a commendable step toward curbing false green marketing tactics.
Legal Ramifications under IPC Section 415
Beyond consumer protection laws, the Indian Penal Code (IPC) Section 415 addresses fraudulent misrepresentation. When corporations willfully engage in misleading advertisements to induce consumers into purchases they wouldn’t otherwise make, it amounts to cheating. Legal repercussions under this section include imprisonment and fines, emphasizing the gravity of such fraudulent practices.
Sustainable Solutions: A Global Perspective on Combating Greenwashing
Globally, the issue of greenwashing extends beyond India, with countries like the UK, USA, and France relying on consumer protection and advertisement laws to combat deceptive green marketing. Despite such efforts, there’s a notable lack of comprehensive development to address misleading advertisements at their roots on a global scale.
To counteract this, promoting consumer awareness is crucial, but additional solutions are imperative. The European Commission’s proposal of a ‘lifecycle assessment’ for goods and services, measuring environmental impact, offers a promising approach.
Additionally, implementing standardized sustainability labeling, instead of companies making unregulated claims, could empower consumers to make informed choices aligned with their values.
Conclusion & Suggestions
The pervasive issue of greenwashing in corporate practices demands a comprehensive response. The intricate relationship between corporate governance and greenwashing, driven by self-interest, has led to deceptive practices, compromising the credibility of Environmental, Social, and Governance (ESG) reporting. External scrutiny, indicated by cross-listing status, and the presence of independent directors play vital roles in mitigating greenwashing. Regulatory interventions, such as SEBI’s Business Responsibility and Sustainability Report (BRSR) framework, aim to standardize reporting, while legal measures under the Consumer Protection Act and the Indian Penal Code reinforce accountability. Globally, proposals like the EU’s Corporate Sustainability Reporting Directive set standards for comprehensive due diligence.
To counter greenwashing effectively, companies are advised to appoint independent directors with environmental expertise and establish Environmental Governance Indicators. Regular reporting on these indicators enhances transparency. Aligning with global standards, as advocated by the UN’s expert committee, and embracing sustainability goals contribute to Environmental, Social, and Governance (ESG) reporting credibility, fostering genuine environmental stewardship. Overall, addressing greenwashing requires a multi-faceted approach, encompassing regulatory measures, legal accountability, and proactive corporate governance practices.
