15th July 2021

What is greenwashing and why is it a problem?

It has been 25 years since Spuerkeess and etika introduced an ethical savings account which, until recently, was Luxembourg’s only sustainable banking product. The objectives set out back in 1996 have lost none of their relevance; in fact the opposite is true. Many companies claim that their products are environmentally friendly, even though this is not the case. Here, Ekkehart Schmidt from etika shares a few tips on how you can avoid falling for “eco-spin”.

1. How do you define greenwashing?

The term “greenwashing” was coined several decades ago to describe campaigns and PR activities which present individual products, whole companies or political strategies in a “green” light, to give the impression that the parties are operating in a particularly environmentally friendly, ethical and fair way, even if this is false. A more recent term is “social washing”, which refers to the covering up of questionable working conditions.

Companies adopt these practices because many customers are willing to pay more for sustainable products. However, as truly making the switch to sustainable products tends to be associated with high or higher costs for businesses, they fake it instead.

2. Greenwashing is nothing new. Is it really on the rise, and if so, why?

Yes, without a doubt. These days, there are “organic”, “fair” and “sustainable” versions of just about every mass-market product. From carbon-offset flights to sustainable palm oil and beef from “Brazilian wellness farms”, as Kathrin Hartmann writes in “The Green Lie”. This has become particularly noticeable in the area of financial products over the last year or two. Customers, especially institutional investors, are demanding sustainable products. But if you cannot “deliver” you have to fake it in order to meet expectations and stand out from your competitors. Numerous studies by the Global Sustainable Investment Alliance show that there has been a huge increase in the number of financial products claiming to be sustainable.

Presumably, the EU would not introduce a regulation on such products (the so-called Taxonomy Regulation) if there was not a problem. The problem is that the Paris Agreement on climate change requires the financial sector to invest in “green” industries. To really be “Paris-compliant”, you cannot just fake it.

3. Apart from misleading consumers, which leads to consumer scepticism, why should greenwashing be an issue?

It’s not the immorality of consumers being misled or the fact they are becoming increasingly distrustful that makes it an issue. After all, for the most part, no-one is actually lying. However, when it comes to the climate and biodiversity crisis, we are talking about a global problem that is threatening our very existence. And by faking a solution, we are just kicking the can down the road. We cannot simply fudge a solution. And the longer we put it off, or settle for pretend solutions, the greater the cost will be. It is not about the ethics of business models, but about the need to transform an economy which is still largely based on the externalisation of social and environmental impacts. Real prices, that are prices which internalise harmful production methods, require transparency throughout every supply chain. Speaking of harm, greenwashing is detrimental to everyone, not just to the companies – they themselves agree. By engaging in it, they are destroying their most important asset: their credibility and with it, their image.

4. Is there a European Union regulation? If so, is it effective?

Since March, the SFDR has been part of a larger regulatory framework. This is an action plan for sustainable finances of the European Commission. From now on, managers of “sustainable” products shall explain to what extent sustainability considerations were taken into consideration. Going forward, the SFDR will be flanked by a taxonomy that will clarify what products and services can be considered sustainable or not. The regulators are considering the creation of a European eco-label for financial products as well as the expansion of the reporting requirements of non-financial information. We welcome these steps that are being taken because they may prevent greenwashing.

5. With respect to Luxembourg, which sectors are affected by greenwashing?

As a country which is very heavily dominated by the service sector, and the financial centre in particular, we have fewer issues with some industries than other nations. Most importantly, the financial centre is a global hub for investment funds. This is why etika has already reviewed the funds industry on two occasions and produced its Sustainable Investment Guide, most recently in 2009. So this is not a new topic.

We scrutinised every fund with a name that suggested sustainability, such as “water” or “renewables”. We had to look very carefully at the investment brochure to separate the wheat from the chaff. It is not enough to be sure that the money is actually being invested in hydroelectric power stations. In Brazil, for example, the construction of dams to generate electricity is not only destroying nature but also displacing the indigenous population. These people are then forced to move to the big city favelas, which is the opposite of sustainable…

6. Many companies claim that sustainability is a top priority. How can consumers be sure that the products and services they are purchasing are environmentally friendly?

When companies make statements like this, consumers must start by checking whether they are referring to their internal processes or their products. What is the good of installing solar panels on the roof and serving organic meat in the canteen if their production methods remain the same? Or if they have simply added two sustainable products onto their usual ten unsustainable ones. This applies especially to the food industry. Also, you should not believe everything you see and read. Terms are often used to try and create a false impression: too often, words like “traditional”, “hand-crafted” and even “artisanal” are used to dress up manufacturing processes which are in fact industrial. Frequently, sustainability is nothing more than words; or we unwittingly buy eggs or meat from factory farms because of the happy chicken or funny piggy beaming at us from the label. The main thing here is to try and cultivate a healthy distrust and look for credible labels. Or simply ask the retailer! So, be informed and insist on transparency.

7. Etika has been our partner for 25 years. Can you tell us something about our work together? What have been the challenges? What have been the highlights?

The highlight for us is still the fact that a bank and a civil society organisation have created a joint product together: our alternative savings account. By combining our strengths, I believe that we have developed a successful product. To begin with, marketing this savings account was a huge challenge. The financial crisis in particular helped us to exceed the key milestones of 1.000 accounts and EUR 50 million.

I think we can be proud of our role as pioneers of truly sustainable finance. Our civic commitment, however, did not always go down well with everyone, especially our persistent awareness-raising about ethics in finance.

8. How have consumers changed in the last 25 years? What is the big difference between then and now?

The 2008 financial crisis brought home to many people that we cannot carry on as we are, and the current Covid crisis is having the same effect. People have realised that we have to focus not just on price and returns, but ecological and social factors as well. They are now demanding real change and insisting on transparency. Both must become essential components of every company’s and every bank's sustainability strategy. Consumers are not as naive as they once were.

9. What are your five top tips on the subject of greenwashing?

The following thoughts, perhaps:

Five top tips on the subject of greenwashing

1. Consider your values. Learn to apply a trio of criteria: an attractive price is one criterion, the other two are the social and ecological impacts of production.

2. Actively inquire. You can ask retailers if they have an organic option or an alternative product with proven sustainability. See consumption as a political act. Support sustainable sellers/producers by buying from them and avoiding others.

3. Awareness. The easiest way to find out if a company or a brand is engaging in “greenwashing” is to search for numbers or evidence to support their claims, rather than simply taking them at face value.

4. Healthy distrust. If you suspect that products are not what they seem, try to find the most neutral, most independent institutions to help you choose: Öko-Test magazine (for German speakers) and consumer advice centres are examples of good sources.

5. Analyse and search. With frequently purchased products, you should not give up on trying to find the really good ones. Whatever the claim (organic, fair trade, eco, animal welfare, climate-neutral, etc), serious companies will have labels from recognised certification bodies on their packaging.

Thank you very much for this interesting interview.

You are welcome.

About the blog:

There is an urgent need for rapid transition to Global Environmental Sustainability. Thanks to changemakers, progress is possible. "Why does it matter?" is a bi-monthly series that takes a quick look at the forefront of today's trends around  sustainability. From May 2021 on, we aim to elucidate this important topic through the eyes of our experts. 

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