By Joshua Sherrard-Bewhay, ESG analyst, Hargreaves Lansdown
On 31 May, the FCA’s new anti-greenwashing rule came into force.
The new rule requires FCA-authorised firms to be ‘fair, clear and not misleading’ when making sustainability-related claims about their products and services. In short, any sustainability-related claims must be correct and capable of substantiation, clear, comparable and complete.
The anti-greenwashing rule is the first part of a wider package of sustainability-related regulation rolling out across the financial services industry, known as the Sustainability Disclosure Requirements (SDR). SDR is the FCA’s attempt to catch up to an industry whose development has outpaced the regulator in recent years.
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But greenwashing is not a problem confined to financial services. Whether it is what you invest your money in, which car you drive to work, or what company flies you on holiday, history already tells the story of companies warping, inflating and exaggerating environmental claims for financial gain.
When companies get it wrong
Volkswagen – One of the most notable cases of greenwashing in recent history was Volkswagen’s emissions scandal, dubbed ‘Dieselgate’. Having famously pushed a ‘clean diesel’ marketing campaign as part of a strategy to become the world’s largest carmaker, independent investigations uncovered that defeat devices were installed in vehicles to detect when they were being tested and change performance to improve results. Most notably, nitrogen oxide emissions were found to be as much as 40 times higher than allowed by US law.
The global scandal snowballed, leading to a share price drop of more than 40% in the immediate aftermath, a bill of more than $34bn to date, and even a 7-year prison sentence for one VW manager in the US. Further investigations have also found that various VW models underreport carbon emissions by 25%. This seismic event irreversibly damaged VW’s reputation, conned millions of consumers and severely undermined the firm’s environmental targets.
Airlines – Fast forwarding to 2024, 20 airlines have recently been flagged by EU regulators for “several types of potentially misleading green claims”. The most notable being companies charging a higher price for tickets that “reduce or counterbalance the flight’s emissions” using carbon offsets or ‘sustainable aviation fuels’, which still emit some carbon when they are burnt.
What good looks like to us
Companies need to approach sustainability in a measured way. Any sustainability-related claims must align with the company’s core business values, and sustainability considerations should form part of the overall business strategy, operations and decision-making processes. Any sustainability-related targets should follow the SMART formula – they should be specific, measurable, achievable, relevant and time-bound, and aligned to recognised standards such as the Taskforce on Climate-related Financial Disclosures.
Transparency is incredibly important – companies should produce comprehensive ESG disclosures with detailed information on any targets they’ve set and what progress they’ve made towards them. Those with the most comprehensive approach will engage with stakeholders, such as investors, regulators and others to explain their approach and ensure it’s well understood. Companies should also be mindful of sustainability-related factors in their supply chain, and conduct regular supply chain assessments.
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Finally, sustainability considerations should be embedded into companies’ governance and oversight processes to ensure senior leaders are accountable for the delivery of the sustainability strategy. A good way to ensure interests are aligned here is to link executive compensation to sustainability targets.
Case study: Microsoft
Microsoft has made significant commitments to sustainability. The firm plans to remove more carbon from the environment than it emits by 2030. This ambitious goal includes reducing its carbon footprint across its operations and supply chain, investing in renewable energy, and advancing sustainable product design. This commitment extends to water and waste management, with goals to become water positive and achieve zero waste across its direct operations by 2030.
By 2050, it aims to remove all the carbon it’s emitted either directly or through electricity use since its founding in 1975. Microsoft also invests in technology and innovation to help other organisations achieve their own sustainability goals, reflecting its broader commitment to global environmental stewardship.
This commitment to sustainability is underpinned by robust governance structures and high-quality disclosures. Microsoft’s Board of Directors includes a Regulatory and Public Policy Committee that oversees environmental sustainability policies and strategies.
The company provides comprehensive and transparent sustainability reports, aligned with globally recognized frameworks like the Global Reporting Initiative and the Sustainability Accounting Standards Board.
These reports detail Microsoft’s progress on sustainability goals, including metrics and key performance indicators, which are independently verified. This transparency ensures accountability and allows investors to track Microsoft’s sustainability journey, thereby reducing the potential for greenwashing allegations.
This article was originally written for our sister publication, PA Adviser
