I'd like to conclude this module with a discussion of the topic of greenwashing. Why should you care about greenwashing? Greenwashing has been a major subject in the news recently. Complaints are being filed with the FTC, articles and opinion pieces are accusing firms that are committing to climate goals as having engaged in greenwashing, and new laws in the EU prohibit certain forms of greenwashing when it comes to financial services. As a result, it's very important to be aware of what greenwashing is, how not to do it, and what the overall governance regime is for greenwashing. First of all a definition, what is greenwashing? Scholars have defined greenwashing as the act of misleading consumers regarding the environmental practices of accompany, known as firm-level greenwashing, or the environmental benefits of a product or service, known as product level greenwashing. We can think about greenwashing as falling into four primary categories. First, there are statements which are simply false. This could be a statement in an advertisement or in marketing materials that lacks proof or is demonstrably false about a product or service or about the firm's overall environmental performance. This could be a claim that a product is recyclable when it's not, is biodegradable when it is not or contains recycled materials when it does not in fact contain those materials. The second category involves statements that are misleading. These could include statements in advertisements or marketing that are vague, like this product is quote, "all natural" when the term "all natural" doesn't really have a technical meaning. Or they don't have assertions that can actually be false or true, but create the impression of positive environmental performance about a product service or the firm itself. Third, there are symbolic communications that can be false. Rather than a statement, this could be putting a label on a product that implies that the product is organic when in fact it is not organic, or putting a label on a product suggesting that it has been certified by some third party environmental organization when in fact that third party has never certified this particular product as meeting those environmental standards. Finally, there are misleading symbolic communications. This is something like the use of a symbol in association with a product service or the firm that creates a misleading impression of positive environmental performance when that is not in fact the case. This could involve spelling out the firm's name in green letters. What does greenwashing look like? It can include the selective disclosure of positive, but not negative environmental attributes of a product. Or it could be a directly false statement about a product. It could be a dubious or false certification or label, a coopted endorsement, a vague statement or symbol, or misleading visual imagery. There are many, many different ways to engage in greenwashing. Why do firms engage in greenwashing? To some extent there may be financial incentives unfortunately to do so. Firms with poor environmental performance may seek to highlight a positive aspect of their environmental performance in order to gain financial and reputational benefits. In recent years, more capital has been flowing into sustainability marketed funds and other ESG funds, increasing the incentives for firms to highlight environmental performance even when it is not backed up by the facts. Another challenge is that there is limited enforcement of greenwashing laws in the United States. There are laws at the US level, which I'm going to talk about in just a moment that are enforced by the Federal Trade Commission against deceptive advertising and there are state consumer protection laws. There are also private forms of enforcement ranging from Twitter shaming to the idea that in order to make claim x about the environmental attributes of a product, you need to get a certification from this non-governmental organization. There's also a law at the EU called the EU taxonomy, which deals specifically with greenwashing, but it doesn't apply directly to firms in the United States. I want to just talk about each of these. In the United States, in 1914, congress passed the Federal Trade Commission Act, which established the Federal Trade Commission, also known as the FTC. The idea was that the FTC's goal was to prevent anti-competitive deceptive or unfair business practices in order to protect consumers. Section 5 of the FTC Act prohibits what are known as "unfair or deceptive acts or practices in or affecting commerce." This is the principal federal law that promotes truth in advertising and marketing and gives the FTC the authority to enforce this law, either by seeking penalties or seeking an order to cease and desist in whatever is the prohibited practice. How does this act apply to green marketing claims or greenwashing? In the 1970s, there was a rise of green consumerism. Either as a result or at the same time, more firms and marketers began to make misleading environmental claims to tout the environmental benefits of a product in ways that were not necessarily fully disclosing. The FTC has general authority under Section 5 of the FTC Act and uses this authority to go after claims being made by firms that their products were biodegradable primarily detergents and these claims were not necessarily true. In the 1980s with news of the hole in the ozone layer being caused by chlorofluorocarbons or CFCs, the Federal Trade Commission began to issue cease and desist orders on claims that certain products were "ozone friendly" when those cleans couldn't be backed up. In the 1990s, states started adopting green marketing laws. This led to a plethora of different standards. In 1992, the Federal Trade Commission created what were known as the green guides. The green guides are essentially guidance. It's not itself a statute or a regulation, but it's an interpretation of how the FTC interprets Section 5 of the Federal Trade Commission Act to apply to green marketing claims. After these green guides were first adopted in 1992, they've been subsequently revised and the current version was most recently revised in 2012. What are the basic principles behind the green guides? The basic principles are that an advertisement should be truthful. It should not be misleading or deceptive and that firms should have adequate substantiation to support all reasonably interpreted claims. This seems relatively straightforward. In the 2012 version, I'm not going to go back in time over the original versions, there were some modifications to include guidance for compostable, source reduction, ozone safe and recyclable or recycled content claims, as well as claims related to please recycle. In addition, the 2012 version of the green guides provides additional clarification and guidance for terms like recycled and recyclable, as well as more guidance on how customers or consumers are likely to interpret green marketing claims. The key here is that we're not looking at the intent of the firm marketing the product, but rather how it is that consumers are likely to interpret the claims. In addition, the 2012 guides give guidance on how marketers can qualify their claims in order to avoid claims of deception or what specific types of information they need to provide in order to make a claim acceptable. Some of the topics that are addressed are claims about carbon offsets, claims about whether a firm or a product has a certification or a seal of approval, claims about whether a product is free of a certain substance or whether it's non-toxic, whether the product was made with renewable energy or made with renewable materials. Each of these has a separate set of guidance within the green guides. How have the green guides being used? One prominent example was in the Volkswagen emissions cheating case. What did this firm do? Volkswagen, major auto manufacturer, manufacturers diesel vehicles. These diesel vehicles needed to meet certain standards under the Clean Air Act as well as California emissions law. But what they did was, they equip these vehicles with software that could detect when a vehicle was being tested as compared to when it was driving on the road. They only turned on the full emissions control process when its emissions were being tested. On the road, cars actually emitted up to 40 times the standards for certain tailpipe emissions. As a result Volkswagen and its officers faced not only civil penalties under the Clean Air Act and California law, but also criminal penalties and they settled with the Federal Trade Commission for marketing these vehicles as cleaner than they actually were. What about other cases not involving millions and millions of cars? The Federal Trade Commission has brought more than three dozen enforcement actions over the past 10 years under Section 5 of the FTC Act. The biggest cohort of these claims involved marketing that said that a product did not contain volatile organic compounds, that a product was bio-degradable or that a product was natural or organic when in fact these claims were not true. The second largest cohort of claims involved Rayon being marketed as bamboo. The final category was a bit of a catch-all including false certifications, claims about the percentage of recycled materials, and energy efficiency claims. Many states also have truth in advertising laws that are even more specific or stringent than the Federal Trade Commission Act. For example, in the state of California, it is illegal to falsely advertise a product with an unqualified environmental claim. California law also bans the use of the word biodegradable for plastics. There have been a number of instances in which firms have violated this law. Recently, the state of California adopted a new law that bans the use of the chasing arrows symbol that we saw earlier, like the number 1 with the three arrows around it indicating that a product is recyclable if in fact that product is not widely recyclable in the state of California. What about beyond the United States? In the UK and in Canada, there are also truth in environmental advertising laws. In the UK, for example, there's a guidance that makes clear that claims about the environmental attributes of a product have to be truthful and accurate, not omit or hide important information, only make fair and meaningful comparisons and to consider the full lifecycle of a product, as well as to be substantiated in data. In addition, Canada has some specific standards with respect to the environmental claims and attributes of investment funds. The EU has arguably gone a step further than the United States in this regard by creating something called the EU sustainable finance taxonomy. The focus of the sustainable finance taxonomy is to prevent greenwashing, specifically in the financial sector. It defines what can be labeled as a sustainable investment in the European Union. The idea is that an economic activity supported by this investment fund needs to be something that's substantially contributes to at least one of six different environmental objectives that are listed in the taxonomy and at the same time not do any significant harm to the other five objectives. There are some concerns at the moment about how effective this will be but it's relatively new. I'd like to keep an open mind. The six environmental objectives in the EU taxonomy are climate change mitigation, climate change adaptation, sustainable water use and protection of marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. As a side note, I'd like to mention that we have covered all six of these environmental topics in these modules. In addition to the EU taxonomy, there's also a new statute in the EU called the sustainable finance disclosure regulation or SFDR, which went into effect at least in its first implementation on March 10th of 2021. This is a disclosure regulation that binds financial market participants in the EU who need to provide mandatory disclosure about their sustainability policies and how they integrate sustainability risks into their investment decision-making. More demanding standards and rules are going to come into place in 2022. How is this a greenwashing regulation? Well, one of the challenges is what should the remedy be for greenwashing? Many scholars will argue as well as policymakers that the best solution is better information for consumers. If there are mandatory disclosures about the ways in which certain firms or products are engaging with environmental sustainability goals this may be the best way to provide information to consumers about whether to buy a product or invest in a fund. There are also private governance approaches that aim to address greenwashing. For example, the National Advertising Division, which is the advertising industry's self-regulatory body. Its goal is to monitor national advertising for truthfulness and accuracy. This is something on the private sector sphere and other countries have voluntary processes like this. Usually in this case, if there's a claim that raises concerns, it may be a competitor that files a complaint and there's a kind of voluntary proceeding. But if a firm remains non-compliant and continues to make a misleading advertising complain, it is possible that that will result in a reference of the case to the Federal Trade Commission. As I mentioned, there's another form of private governance to ensure that environmental claims are truthful and that is a third party certifications. There are certifications addressing all different forms of environmental performance. These include certifications by the Marine Stewardship Council that a fishery is being managed in a sustainable way and certifications from the Forest Stewardship Council that a forest is being harvested in a way that is sustainable going forward. There are other certifications that apply to greenhouse gas emissions as well. Many different firms that are making commitments, for example, to reduce their greenhouse gas emissions to reach net zero by 2050, are pursuing certification from the science-based targets initiative or SBTI, including many of these firms. This is a way to verify that the cleans are in fact in compliance with the latest scientific standards. What's next for greenwashing? Regulators and others, including the Twitter verse, are on high alert with respect to cleans not just about products, but claims at the level of the firm. We are a green firm. We are doing a lot for the environment as compared to this product is green. In addition, there is increasing emphasis not just on statements, but also on symbols and symbolic speech. What are the key takeaways from this module? First, I want you to remember that business leaders need to think about product stewardship and the complete life cycle of their products. Second, I want to be sure that you understand that voluntary product stewardship programs exist, but there is an increasing number of mandatory extended producer responsibilities, both in the states and abroad. Third, as the interest in environmental protection and product stewardship grow, there is a risk that firms will exaggerate their environmental performance and so business leaders need to be mindful of the limits on green marketing claims. Finally, both public and private actors are watching these claims closely.
