What is Greenwashing in ESG? How to Spot and Prevent It for a Truly Sustainable Future

The world is rapidly embracing the need for environmental sustainability. Investors are prioritizing Environmental, Social, and Governance (ESG) factors, and consumers are demanding eco-friendly products and services. This momentum has driven many companies to showcase their green initiatives. However, not all of these claims are genuine.

Welcome to the world of greenwashing — where businesses mislead stakeholders by exaggerating or fabricating their environmental credentials. In today’s ESG-driven economy, greenwashing has become a significant challenge, undermining trust and slowing true sustainability efforts.

What is Greenwashing?

Greenwashing refers to the practice of making false, misleading, or unsubstantiated claims about a company’s environmental practices or the eco-friendliness of its products or services. It’s a marketing tactic designed to capitalize on the growing demand for sustainability — without actual accountability.

Common Examples of Greenwashing

• Using vague terms like “eco-friendly” or “natural” without evidence

• Highlighting minor green initiatives while hiding major environmental harm

• Branding packaging with green imagery or misleading symbols

• Promoting recycling efforts while maintaining polluting manufacturing processes

Why Greenwashing is Dangerous?

1. Erodes Trust Among Consumers

When businesses exaggerate their sustainability efforts, they damage the credibility of authentic green initiatives, making it harder for consumers to trust any brand’s claims.

2. Undermines Progress Toward Real Sustainability

Greenwashing slows the global movement toward climate action by diverting attention and resources from companies that are truly making a difference.

3. Legal, Financial, and Reputational Risks

Companies caught greenwashing may face:

• Regulatory investigations

• Financial penalties

• Loss of consumer loyalty and brand damage

Greenwashing in the ESG Investment Landscape

The rising popularity of ESG investing has opened the door to a new wave of deceptive practices — known as “ESG-washing.”
To attract ESG-focused investors, some companies overstate their environmental and social performance. This misrepresentation misleads investors and channels capital away from businesses that are genuinely sustainable.

How to Combat Greenwashing:

Combating greenwashing requires a multi-pronged approach involving businesses, regulators, and consumers.

1. For Businesses: Embracing Transparency and Accountability:

• Data-Driven Claims: Avoid vague terms like "eco-friendly" or "natural" without quantifiable data to support them. Give a precise definition of these terms. For instance, instead of using the phrase "made with recycled materials," include the source of the recycled materials as well as the proportion of recycled content. Use standardized metrics and methodologies for measuring environmental impact.

• Life Cycle Assessment (LCA): Conduct LCAs to understand the environmental impact of your products or services throughout their entire lifecycle, from raw material extraction to disposal. By doing so, hotspots and areas for improvement are identified, avoiding "shifting the burden"—improving one area while adversely affecting another. Publicly share summaries of these LCAs.

• Third-Party Verification and Certifications: Seek independent verification of your environmental claims. Employ trustworthy third-party certifications such as Fairtrade, B Corp, or industry-specific environmental labelling. These certifications provide credibility and demonstrate a commitment to rigorous standards.

• Supply Chain Transparency: Extend transparency beyond your own operations to your supply chain. Trace the origins of your materials and ensure your suppliers adhere to sustainable practices. This has significance since the supply chain frequently accounts for a sizable amount of a product's environmental effect.

• Clear and Concise Communication: Avoid jargon and technical terms when communicating your environmental efforts. Make sure your terminology is simple enough for customers to grasp. Focus on the most relevant and impactful aspects of your sustainability initiatives.

• Internal Audits and Accountability: Implement internal audit processes to ensure your environmental claims are accurate and consistent. Assign distinct responsibilities for sustainability projects and make people responsible for meeting goals.

• Embrace a Culture of Sustainability: Integrate sustainability into your core business strategy, rather than treating it as a separate marketing initiative. Encourage an environmentally conscious culture across your company.

2. For Regulators: Strengthening Oversight and Enforcement:

• Clearer Definitions and Standards: Develop clear and specific definitions for environmental terms like "recyclable," "biodegradable," and "compostable." Provide consistent procedures for calculating environmental effect and confirming statements.

• Mandatory Disclosure Requirements: Implement obligatory reporting guidelines requiring businesses to reveal their sustainability and environmental effect. Transparency will rise as a result, and customers will have more knowledge to make wise decisions.

• Increased Enforcement and Penalties: Strengthen enforcement mechanisms and impose significant penalties for companies found guilty of greenwashing. Businesses will be deterred from making misleading or deceptive depictions as a result.

• Collaboration and Harmonization: Promote international collaboration and harmonization of environmental regulations and standards to prevent companies from exploiting loopholes in different jurisdictions.

• Consumer Protection Laws: Address bogus environmental assertions by utilizing current consumer protection laws. Empower consumers to take legal action against companies engaged in greenwashing.

3. For Consumers: Becoming Informed and Critical:

• Be Skeptical of Vague Claims: Be wary of environmental claims that lack specific details or supporting evidence. Seek out legitimate credentials and quantifiable facts.

• Research Companies and Products: Spend some time learning about businesses' sustainability policies. Look for information on their websites, in their sustainability reports, and from independent sources.

• Look for Third-Party Certifications: Products having credible third-party certificates should be given priority. An independent guarantee of environmental performance is offered by these certificates.

• Understand the Limitations of Labels: Be mindful that certain labels might not be as strict as others or might have a smaller scope.

• Ask Questions: Don't hesitate to ask companies about their environmental practices. Be wary if they are unable to provide you good and unambiguous replies.

• Support Sustainable Businesses: Choose to support businesses that are genuinely committed to sustainability. By purchasing goods and services from businesses that do well in terms of the environment, you can vote with your pocketbook.

• Spread Awareness: Discuss greenwashing with your loved ones and urge them to be discerning shoppers.

4. For Investors: Integrating ESG Factors and Due Diligence:

• ESG Integration: Integrate ESG factors into investment decision-making processes. Evaluate businesses' environmental performance and take into account the opportunities and hazards related to environmental challenges.

• Due Diligence: Conduct thorough due diligence on companies' ESG claims. Scrutinize their environmental data and verify the accuracy of their statements.

• Active Ownership: Engage with companies on their environmental performance. Urge them to increase transparency and embrace more environmentally friendly methods.

• Impact Investing: Take into account funding businesses that are actively addressing environmental issues and benefiting the environment.

• Standardized ESG Reporting: Promote comparable and standardized ESG reporting formats to help investors make well-informed choices.

Final Thoughts: The Road Ahead

Combating greenwashing is an ongoing journey. To establish a market where sincere sustainability initiatives are acknowledged and rewarded, companies, authorities, and consumers must work together. By promoting transparency, accountability, and consumer awareness, we can pave the way for a greener and more sustainable future. The fight against greenwashing is not just about protecting the environment; it's about preserving trust and ensuring that the transition to a sustainable economy is built on a foundation of integrity.

CS Chitra Shridhar
Assistant Professor
SAGE School of Commerce

Frequently Asked Questions (FAQ)

Q1. What is greenwashing in ESG?
Ans. Greenwashing is the act of making deceptive or exaggerated environmental claims to appear more sustainable than a company or product actually is.

Q2. Why is greenwashing harmful?
Ans. It misleads consumers, diverts ESG investments, erodes trust, and slows genuine sustainability progress.

Q3. How can companies avoid greenwashing?
Ans. By using data-driven claims, verifying with third-party certifications, and being transparent about their entire environmental impact.

Q4. What are signs of greenwashing?
Ans. Vague language, lack of data, absence of certifications, and exaggerated or selective claims.

Q5. What role do consumers play in preventing greenwashing?
Ans. They can research, question, and support genuinely sustainable brands while spreading awareness about deceptive practices.