Chapter 1: Introduction
With the increased efforts in the area of environmental, social, and governance (ESG), there has also been a rise in greenwashing, wherein companies are portrayed as not telling the truth regarding their environmental efforts (Schumacher, 2023). A recent survey has shown an alarming fact that greenwashing accounts for about 25% of climate-related ESG risk worldwide compared to 20%, as previously noted (Hengartner & Cichon, 2023). There has been a 70% in increment of greenwashing cases on climate change related issues in banking and finance industries (Hengartner & Cichon, 2023). Greenwashing risks are increasingly complex, as firms try to outplay them by misleading consumers directly and using third parties for certification to make themselves look more sustainable. Scrutiny of greenwashing intensifies, and the Securities and Exchange Commission (SEC) fines companies for misleading claims (Schumacher, 2023). With the increased consumer interest in environmentally friendly goods, firms should comply with legal requirements without engaging in greenwashing. It is, therefore, necessary to critically assess the effects of ESG and sustainability on greenwashing in the broader world and suggest solutions for its resolution.
Research Background
Sustainability and ESG programs initially gained recognition as a result of growing concerns with respect to environmental issues as well as corporate social responsibility. Such a strategy convinced companies that its adoption would be beneficial for its brand name and availability to this target market (Yildirim, 2023). Nevertheless, as the need for sustainability increased, so did the urge of companies to indulge in deception tactics. Many cases dating back to this period involve greenwashing, where some companies exaggerated their environmental endeavors or misleading claims of their influence on society.
There was an increased adoption of ESG as an investment measure beginning with the years 2018. Particularly institutional investors started to prefer companies with excellent ESG performance, realizing that sustainable practices offer a significant pay-off in the long run. This resulted in increased scrutiny and competition among companies in the ESG space. In the wake of heightened stakeholders, some companies adopted more complicated schemes of greenwashing (Edmans, 2023). Some proof points to companies that started investing in complex PR and advertising, strategic alliances, and green certificates without substantial changes in actual production activities (Edmans, 2023). The development of these ESG-related indices and rankings also increased motivation for companies to focus more on the appearance of sustainability rather than substantial ESG efforts. In this case, an increase in greenwashing cases could not be adequately accounted for by regulatory bodies. Companies were able to manipulate loopholes arising due to a lack of uniform reporting requirements and agreed upon sustainability metrics (International Finance Corporation, 2022). Corporations became even more daring because there were no enforcement mechanisms. The social media boom and enhanced connectivity resulted in easy-to-get info and experience sharing by consumers like never before (Yongbo & Shi, 2022). However, there is proof that a proportion of consumers were still prone to falling prey to fraudulent marketing efforts. Sustainability became the selling point of the market, enabling businesses to sell themselves to environmentally sensitive customers without making any operational changes.
This research highlights the complex nature of the ESG trends, sustainability program, and acceleration of greenwashing in the USA from 2018 to 2023. Given the rising demand for sustainable products, it is necessary to come up with strong regulatory regimes. Moreover, it involves informing consumers and ensuring clarity. This points out the necessity of cooperation and cooperation of corporations, regulatory bodies, as well as consumers in order for sustainable business is really practiced in its entirety.
Research Aim
This study seeks to explore whether ESG and sustainability have intensified greenwashing in the US over the last decade, specifically between 2012 and 2023.
Research Questions
- Why has there been a rapid increase in greenwashing in the USA within the ESG and sustainability framework after 2012?
- What is the implication of the growing trend in ESG reporting and disclosure in the USA on the practice of greenwashing by companies?
- What are the usual means companies have used for greenwashing in relation to ESG and sustainability practices in America?
Chapter 2: Literature Review
According to Dmuchowski et al. (2022), a significant change has occurred in corporate behavior within the US, characterized by an influx of ESG investments whereby the total ESG investments in the country range at approximately 20%. Companies have become more dedicated to demonstrating that they care about such issues as the environment, society, and good governance through their actions. This has led to a situation where firms compete to adhere to ESG standards as a way of attracting capital inflows or improving corporate image. However, Yu et al. (2020) pinpoint that increased focus on ESG indicators as measures of sustainability performance has unwittingly opened up the door to greenwashing in the US. Despite companies pursuing ESG criteria with the aim of being environmentally friendly and meeting the requirements of ESG, some are instead taking advantage of the growing interest in sustainability. This may include changes such as minor modifications in branding, advertising and inflating environmental or economic sustainability without any significant operational shifts. In some instances, the attractiveness of accessing large piles of ESG-oriented investments has forced some firms to focus on showing that they are sustainable more than real and tangible efforts toward this agenda (Ahmad et al., 2023). According to Fuente et al. (2021), this pressure to meet ESG expectations without an in-depth understanding and corresponding implementation of sustainable practices has encouraged the flourishing of greenwashing approaches among US corporations. Many investors are more readily allocating capital based upon ESG scorecards, while more aware consumers are expressing more significant preferences towards brands embracing ESG policies and sustainability, thereby imposing heavy pressures on companies to establish their credentials as sustainable and responsible. Thus, the build-up of pressure actually leads to occasions when companies place greater importance on looking green rather than doing green, thereby creating a fertile ground in which greenwashing occurs.
Although ESG has become one of the primary measures of corporate sustainability, there is a lack of standardized measurements and inconsistent criteria across industries in the US, and this absence has inadvertently fueled a concerning trend of greenwashing (Cort & Etsy, 2021). Ethically, this is considered false advertising, which involves companies purposely deceiving consumers into believing that they are greener and more ethical than that could be confirmed. Such deceit is possible because there are no set ESG ratings that could be used for comparison purposes. This opacity provides an opportunity for companies to selectively highlight specific ESG issues to show “sustainability,” leaving out those they do not want to be associated with. However, the lack of universal standards makes it difficult enough to make meaningful comparisons of firms. However, Boffo & Patalano (2020) argue that rating agencies or indices may use varying methodologies, metrics, and reporting schemes that lead to inconsiderable differences. Consider, for example, a company that can be ranked top in one of the ESG areas according to one rating agency and vice versa according to another agency. This inconsistency inconveniences investors, shareholders, and buyers at best while leaving them in perplexity at worst. In addition, the evaluation of ESG is subjective, and thereby, a company can misrepresent its disclosures. They tend to make a deliberate choice to highlight specific positive issues but deliberately diminish others as part of their commitment to sustainability. This is supported by (Billio et al., 2021) through an illustration where corporations may engage in aggressive advertisement campaigns that focus on carbon emissions reduction, ignoring significant concerns such as labor issues and community effects at large. Such selective disclosure deceives the stakeholders and also discourages the companies from sincerely seeking total sustainability. Also, Jámbor & Zanócz (2023) add to this by revealing that lack of uniformity makes it difficult for regulatory authorities to oversee operations and be held responsible for them. Regulators do not have consistent guidelines on how to monitor and enforce ESG based on marketing, and that gives companies an opportunity to misrepresent their commitment to sustainability.
In the realm of ESG rating in the US, there is a lack of audited sustainability performance appraisals (Chodnicka-Jaworska, 2021). As a result, this encourages greenwashing because standards for ESG metrics are unavailable to ensure transparency and consistency in evaluating business practices’ environmental, social, and corporate governance dimensions. This lack of audit provides an opportunity for inaccurate appraisals, allowing firms to overstate and enhance their CSR assertions without proper oversight. Without one single governance entity or an established methodology for ESG rating approval, corporations find it possible to misuse such regulations and create a society based on the falsity of ESG statements. This is supported by (Zhang et al., 2022), who reveal that if companies do not have strict auditing processes, they can provide false documents and reports regarding their sustainability, highlight false, superficial improvements, and bypass vital sustainability concerns. One example of this is when a corporation would indicate its philanthropic efforts and environmental-friendly ventures but fails to indicate its efforts on issues such as supply chain integrity and company diversity. This failure of external checks raises doubts about the authenticity of these ESG ratings and makes it difficult for investors, customers, and other stakeholders to take informed action. Besides, no global regulator is monitoring the company’s sustainability evaluation (Nygaard, 2023). Therefore, it results in uncertainties across the globe because various rating agencies and indices apply different approaches and factors, thus arriving at diverse assessments of one company. The absence of a unified environment allows businesses to choose the assessment they would most preferably want to portray their strengths over critical weaknesses as part of the greenwashing tactics. Also, there are no standardized audits or regulatory oversights that could make it costly for companies to pursue greenwashing initiatives. Therefore, companies use falsified ESG ratings or misreporting sustainability practices to incur minimal punishments for deceiving stakeholders. In addition, the leniency creates an atmosphere in which companies prioritize optics instead of significant and integrative sustainability efforts that actually threaten the comprehensive sustainability initiatives of many firms.
However, Do & Vo (2023) oppose this by highlighting that greater attention given to ESG policies and sustainability has also been characterized by increased scrutiny that has resulted in regulatory action to address greenwashing issues. Given the growing consumer demand for sustainable products and ethical investment, the US perceives it imperative to ensure the integrity of any ESG claim put forward. Thus, the US government aims to enforce more regulatory measures in addressing such greenwashing concerns. The Federal Trade Commission (FTC) has begun reforming its “Green Guides” guidelines to help companies steer away from false green advertising (Kertscher, 2023). The FTC has authority in this regard and could act if companies do not comply with the guidelines. Additionally, the review of the Green Guides will likely lead to more stringent enforcement and adherence. In the past, the Federal Trade Commission has also enforced its regulatory powers against companies involved in greenwashing practices. Along with the FTC regulatory activities, initiatives towards a uniform obligatory reporting methodology have emerged to eliminate obscurity and increase credibility in ESG reporting. This is also supported by the US Securities and Exchange Commission (SEC), which has increased monitoring and has warned that companies caught in the exaggeration of sustainability claims will face prosecution.
Enforcement action was taken by the SEC against the companies that made misleading disclosures about ESG reporting, demonstrating the intensified focus of the SEC on ESG reporting violations. For example, many times, companies were penalized after they exaggerated their environmental claims or falsified their ESG reports. In 2017, Solar City stipulated settlement with respect to alleged false claim act violations pertaining to grant claims issued to the Treasury. The government alleged that Solar City submitted inflated certified Section 1603 claims to the Treasury by including overstated costs for solar-energy properties (US Office of Public Affairs, 2017). From a broad perspective, Greenwashing is a problem that must be avoided in all sectors. Companies must be ahead in responding to the transforming regulatory environment surrounding ESG. They must verify whether these claims are supported by factual findings by conducting due diligence on the sustainability statements made. Organizations need to be upfront about their actions regarding sustainability by providing supporting evidence of real events instead of justifying their actions and decisions based on false facts and promises. Therefore, companies have to perform a close assessment of all their ESG disclosures in consultation with their counsel and others so as to remedy any shortcomings. It is not only the sustainability departments and purview of compliance to ensure that the ESG reports are credible, but the boards of directors are at the center of approving or facilitating an effective ESG strategy. Board members should be knowledgeable on the details of their firms’ sustainability practices, making sure the reported obligations match up with physical activities. This is vital as regulatory bodies are now focusing on how boards assist in directing and managing ESG policies.
Chapter 3:Methodology
A methodological approach based on the assumption that qualitative methods, as used and developed by social constructionists, are complementarities to quantitative techniques adopted from the positivist perspective will be deployed. The majority of realists have a positivist perspective, and they prioritize statistics as data. This is where quantitative methods will look into the nature and scale of greenwashing within firms. A survey will target the selected sample of companies in the US, with a focus on their reported ESG scores and sustainability approaches. Other quantitative indicators like quantity of carbon emissions, diversity ratios, and governance structures will be obtained from financial reports and other publicly available documents. Statistical methods like the regression analysis will be used to evaluate the linkages between self-reported ESG metrics and financial performance, implying any inconsistencies suggestive of greenwashing behaviors.
At the same time, a social constructionist approach is incorporated that recognizes qualitative observations to understand the subjective realities and the motives behind greenwashing behaviors. A semi-structured interview will be conducted with key stakeholders such as corporate executives, industry experts, environmental activists, and/or regulatory authorities. The qualitative results are going to undergo an athematic analysis that will identify themes to do with greenwashing strategies, motivation, and specificities in the industry. Combining qualitative and quantitative data on the phenomenon will help verify and supplement the findings, hence answering the subject matter adequately. Considering that researchers lie along a continuum between positivism and social constructionism, the mixed-methods approach employed in this study allows flexibility to use the most appropriate methods for each aspect of the research question. Combining quantitative rigor with qualitative depth, the approach seeks to analyze the dynamics between ESG, sustainability, and greenwashing in the USA’s corporate domain from 2015 to 2023.
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