ERM Report Reveals 68% of US Corporate Leaders Engage in Greenwashing

A recent report by Environmental Resources Management (ERM) reveals a significant issue in the ESG rating market: greenwashing. According to the study, 68% of corporate leaders in the United States admit to engaging in greenwashing practices. This revelation underscores the importance of vigilance in assessing companies’ environmental claims for investors and ESG raters.

Greenwashing involves making false or unverified environmental claims to mislead the public and investors. The UK Law Society defines greenwashing as “untrue or misleading statements about the environmental performance or impact of a business, product, or service.” While some instances are unintentional due to vague terms like “net zero” and “eco-friendly,” the legal consequences are equally severe.

The global surge in ESG interest has led to misleading statements, prompting new regulatory measures. In Europe, the EU Green Claims Directive, European Company Directive, and Corporate Sustainability Reporting Directive aim to address greenwashing, while the UK implements Sustainability Disclosure Requirements. In the U.S., Section 5 of the Federal Trade Commission Act, SEC Climate Disclosures, and the ESG Enforcement Task Force are in place. Asia has also responded with Singapore’s green labeling scheme, South Korea’s Environmental Technology and Industry Support Act, and Japan’s Green Claims Guidelines.

The report highlights Volkswagen’s 2015 scandal, where the company paid over $20 billion in fines for manipulating emissions data, as a prominent example of greenwashing’s severe repercussions.

ERM emphasizes the crucial role of ESG raters in identifying greenwashing. They must provide accurate assessments by assessing corporate performance, ensuring claims are scrutinized and evaluated for accuracy, offering reliable information for investment decision-making, and promoting accountability and transparency to encourage companies to improve performance and maintain investor trust.

ERM outlines several methods ESG raters use to detect greenwashing, despite inherent limitations. Advanced technologies like Natural Language Processing (NLP) assist in identifying and evaluating greenwashing through text analysis and sentiment detection. However, AI alone cannot fully address the issue due to its limitations in context and evidence, necessitating human oversight.

ERM suggests that combining AI with human expertise offers promising opportunities to tackle greenwashing. AI can help identify language patterns and anomalies, while human judgment ensures a comprehensive understanding of ESG risks. This combined approach can enhance the accuracy and transparency of greenwashing assessments, protecting investors from regulatory, financial, and reputational risks.

ERM’s report highlights the critical need for accurate ESG ratings and underscores the importance of integrating greenwashing risks into assessments. By leveraging AI and human expertise, ESG raters can better detect and mitigate greenwashing, ensuring that investors receive reliable information for their sustainable investment decisions.