Greenwashing by association – the new threat facing corporates

YOU may be familiar with the term “guilty by association”, but how much do you know about “greenwashing by association”? The latter is a new concept, but a growing threat that companies cannot afford to ignore.

The fundamentals of both are similar. Someone “guilty by association” is thought to be guilty of a crime not because of any direct evidence against him, but because of his association with a known offender.

For a company, greenwashing by association happens when the company is seen or known to be associated with a party that is guilty of greenwashing.

Tainted by association

A new report by the Asia Investor Group on Climate Change (AIGCC) and environmental law non-profit ClientEarth, published recently, said that companies can be accused of greenwashing even if they were not the party making false or misleading green claims.

In Greenwashing and how to avoid it: An introductory guide for Asia’s finance industry, AIGCC and ClientEarth pointed out that it is now more widely accepted that greenwashing does not require intentionality. In other words, greenwashing may be deemed to be committed regardless of whether the entity intended to mislead.

This can happen with greenwashing by association. Examples include:

• Intermediaries or asset managers who include companies in their green portfolios based on the portfolio company’s greenwashing, and represent their portfolios as green;
• Companies that have joined net-zero alliances but do not meet alliance commitments; and
• Companies claiming to be green but funding organisations that lobby against Paris Agreement-aligned goals.

While the report focused on examples in the finance industry, the risk applies to companies in other sectors as well.

The threat to companies comes from regulators and rivals – and, really, from just about any quarter. Regulatory regimes in Asia seeking to police greenwashing are likely to address greenwashing by association, too. And greenwashing by association could also be the basis for, or form part of, greenwashing allegations brought against a company by its competitors or stakeholders.

Hush, hush?

So, how should companies manage such a risk?

Some might choose to pull back on disclosing their green credentials, thinking that the less they say (or brag about), the safer and less accountable they will be – a practice some have labelled “green-hushing”.

This would hardly be ideal, however. AIGCC/ClientEarth’s report pointed out that, given the immense green-market opportunities out there, companies are likely to continue wanting to showcase their green credentials.

It also said companies are increasingly under mandatory legal obligations to make climate disclosures, regardless of whether their product lines or services are specifically focused on green industries or investments. Making specific, clear and accurate disclosures relating to material climate risks and other information – including forward-looking climate risks – could therefore be safer than omitting such information entirely.

Being vigilant

Instead, companies need to stay on top of associations that can potentially expose them to claims of greenwashing.

This means conducting due diligence before entering into relevant transactions. Companies will need to examine and verify green claims made by associated parties, ask for more data, understand how these affect one’s own green standing, and stay on top of such information.

In the case of the aforementioned example of net-zero alliances, companies need to stay abreast of the commitments required – this may mean making a decision to pull out of an alliance if one’s net-zero plan(s) start to diverge from the alliance’s requirements.

If companies run into issues or limitations with information gathered or data used to substantiate claims, they should consider being transparent about such issues as opposed to trying to mask them.

Companies should also be familiar with the regulatory requirements that affect their associations, especially if they are transacting in jurisdictions other than their own. They should also be aware of “softer” measures, such as stewardship or corporate governance codes, that may inform stakeholder expectations.

And, it is important that individuals within the company – from board directors, to executives, to employees involved in the transactions that affect the company’s green claims – are well versed when it comes to their obligations.

All this is easier said than done. Climate-related disclosures and claims of greenwashing are still relatively new developments, so much so that an exact definition of greenwashing has yet to be fully or even widely agreed upon.

This is dynamic and uncertain territory – one in which a company’s best approach is to be well advised and well prepared.