Brands making misleading claims are not always penalised by the public, which means regulators need to step in. David Burrows reports.
Is it worth making green claims? Research published by McKinsey and NieselnIQ recently suggests so. They analysed five years of US sales data to June 2022 covering 600,000 individual product SKUs from 44,000 brands across food, drink, personal care and household goods. They found 93 different ESG-related claims that they grouped into six categories: animal welfare (with claims such as ‘cage free’, ‘cruelty free’ etc); environmental sustainability (‘compostable’, ‘eco-friendly’ etc); organic positioning, plant-based, (‘vegan’); social responsibility (‘fair wage’, ‘ethical’ etc); and sustainable packaging (‘plastic-free’, ‘biodegradable’ etc).
They found that those products carrying such claims accounted for 56% of all growth (or about 18% more than the experts would have predicted in 2017). The products making these claims averaged 28% cumulative growth over the five-year period, against 20% for products that made no such claims. The ‘green’ products also boasted a 1.7 percentage point advantage on CAGR (compound annual growth rate) – which is “significant” in a mature and modestly-growing market, according to the consultants.
“Green claims definitely impact consumer decisions and are becoming an increasingly important purchase factor,” says Nusa Urbancic, campaigns director at Changing Markets Foundation. “I would suspect that the impact on actual purchasing decisions would be even bigger in the UK market, than in the US, as UK consumers are generally more sensitive to environmental and social issues.”
The findings are good news for truly sustainable brands, but also great news for greenwashers. Indeed, the veracity of the claims was not checked by McKinsey and NielsenIQ but it’s a fair bet with terms like ‘biodegradable’ and ‘eco-friendly’ in the mix that there’s plenty of greenwash going on in there. Indeed, research in Europe shows 40% of green claims might actually be misleading.
Law and order
Regulators are beginning to check the finer details however. The Competition and Markets Authority in the UK has introduced a green claims code and is in the process of investigating the claims made by food companies. Changing Markets has just produced a timeline showing how the “crackdown” on greenwashing has “well and truly begun”.
Indeed, as well as activity in the UK, the EU is soon set to announce official rules on how companies can substantiate their green claims. It’s not easy. Leaks of the proposals show firms will likely have to substantiate claims using the product environmental footprint (PEF) methodology – basically a standardised approach to life cycle assessments. Such standardisation helps level the playing field but there are heated battles over the approach and weightings (as Footprint’s newly published report on environmental data details).
How the EU addresses PEF’s shortcomings and then how this plays out in any regulatory action is certainly an area to watch – not least because recent reports by The Guardian suggested companies will have just 10 days to justify green claims or face “effective, proportionate and dissuasive” penalties.
It’s not just the regulators that greenwashers must look out for. Misleading claims can have reputational impacts and erode trust in a brand. “[…] greenwashing negatively impacts a customer’s experience with a company’s product or service,” wrote Ioannis Ioannou, associate professor at London Business School and a specialist in ESG, in the Havard Business Review recently on the back of research he published with experts at the University of Cyprus and the University of Peloponnese in the Journal of Business Ethics. And it is not only a matter of bruised reputation: “when customers believe a company is greenwashing, it directly affects how they experience its products or services”.
Indeed, the researchers worked out that companies perceived to be greenwashing suffered, on average, a 1.34% drop in their American customer satisfaction index (ACSI) score. That’s significant: even small changes in a firm’s customer satisfaction score can have significant implications for corporate performance, they warned.
But there was a twist. Consumers punished those they thought were greenwashing but gave “a pass” to the brands they held in high regard. Whether this buffering effect is temporary or long-lasting is not clear.
There is another twist here, too, picked up in a paper for the Journal of Management Studies. The study – involving experts from the University of Cyprus, University of Queensland Business School, University of Peloponnese and The American College of Greece – tracked 7,365 companies in 47 countries over 15 years; they found that consumers financially penalised firms for greenwashing, but not so much if they were already stigmatised as “dirty”.
They showed that “stigma shields firms from the market fallout of greenwashing by weakening its adverse effect on consumer perceptions of their trustworthiness – especially their integrity – and that it does so by validating a certain ‘boys will be boys’ expectation that stigmatised firms engage in such misconduct”. In other words, the market imposed a “kind of tax on companies for greenwashing, unless they were already regarded as big polluters,” wrote Adam Austen Kay from the University of Queensland and one of the authors, in a blog.
Brands seen as dirty or polluting, like oil and gas firms, who are then caught greenwashing may therefore want to play on their ‘bad boy’ image. The findings have ramifications for regulators. “[…] governments and international organisations that have a “zero tolerance” approach to greenwashing should focus their limited resources on dirty industries and let the market take care of the rest,” Kay wrote.
Food firms, currently at least, aren’t seen as the bad boys. Which means they will be penalised most if they’re caught greenwashing, Pavlos Vlachos from The American College of Greece tells me. It’s the ones doing good that get hit hardest if they’re accused of or found to be greenwashing, he adds.
Does this mean it pays to be the bad guy? Time will tell but with intense scrutiny not only on the claims being made but also the environmental impact of food consumption, the short-term gain from greenwashing is ever more likely to be painful in the long run. “What we need now is much more active enforcement and hefty penalties on companies that continue to greenwash,” says Urbancic, who is soon to publish research relating to food industry greenwashing. A few cases involving big food companies could be enough to tar the whole sector with the same greenwashing brush.