Greenwashing is an evolving issue involving exaggerated or misleading claims about the sustainability or environmental benefits of a product, service, or business. Due to increased pressure from consumer advocates, investors, and stakeholders, a heightened focus is being placed on greenwashing globally.
International companies with an Asian presence are increasingly looking to greenwashing regulations within these jurisdictions to guide them in conducting business. The global environmental, social, and governance (ESG) landscape is developing and countries are responding to ESG risks with various regulatory strategies. Trends in the Asia-Pacific region show that countries are taking a principles-based approach, introducing greenwashing guidelines and encouraging voluntary disclosures. For example, Japan’s Financial Services Agency (FSA) implemented new guidelines this year to address mislabeling by financial services firms pitching environmental impact to ESG investors. Starting in April 2023, new funds with portfolios related to ESG issues cannot market themselves using terms such as “green”, “sustainable”, and “decarbonization” in their names unless they consider ESG as a key component when choosing investments. Existing funds do not need to alter their names, but are barred from labeling themselves as ESG funds if they do not comply. Hideki Takada, Director of the FSA, chose this approach to foster greater disclosure through market forces. Takada noted that because ESG is “a very wide and evolving concept,” he chose a broader approach.
This change follows similar principles-based approaches taken by other Asian regulators such as India which also issued new labeling guidelines for ESG funds this year. The Securities and Exchange Board of India (SEBI) adopted guiding principles to rate companies on ESG issues. Taking a principle-based, rather than prescriptive, approach would allow SEBI to assign scores to more companies, making it more accessible for investors to assess businesses using ESG metrics. These steps fall in line with the country’s goal of reaching net zero emissions by 2070 while promoting SEBI’s purpose of protecting investor interests.
In comparison, the European Union has taken a rules-based approach by introducing mandatory disclosures. For example, rather than letting market forces regulate themselves, European regulations label ESG funds under specific categories known as Articles 8 and 9 and provide discrete taxonomy for what constitutes “green” activities. North America has taken a client-centric approach. For example, financial firms in the United States are beholden to fiduciary duty obligations. This requires ESG funds to prioritize client interests, emphasizing financial performance.
Evolving regulatory frameworks across the globe can make compliance a daunting feat for global companies with footprints in various nations, particularly considering growing investor pressure and concern. According to a recent Capital Group ESG study, sustainability reporting is the most important to ESG investors followed by the ability to select sustainable development goal themes. Capital Group’s study noted that 42% of global investors want effective regulatory enforcement (such as setting minimum standards for investment products and services) to fight greenwashing—the statistic rises to 48% for Asia-Pacific investors. The study also found that these investors think fund managers are essential to winning this fight. By increasing transparency on how fund managers choose to invest, ESG investments—and threats of greenwashing—can be better monitored. Yet, investors vary, based on region, on how to achieve the desired end-goal. For instance, “European investors prioritize harmonizing global standards (48%), North American investors prioritize guidelines for disclosure of ESG risk factors (53%) and Asia-Pacific investors see developing guidelines for ESG reporting as most important (44%).”
Although sustainability reporting is now mandatory in certain Asian nations, including India, Japan, China, South Korea, and Singapore, addressing greenwashing disclosures remains nascent. Voluntary measures can help prevent greenwashing, but the lack of enforceable regulations makes it difficult for consumers to differentiate between genuine environmental initiatives and marketing gimmicks. Thus, the onus may fall on consumers to collectively hold companies accountable for the environmental impact of a company’s products or services.
Lack of Clarity
One particular challenge of complying with greenwashing regulations is the absence of a clear definition of what constitutes greenwashing. Stakeholders in different industries or companies within the same industry may all have varying interpretations, which can make it all the more difficult to comply.
Planet Tracker, a non-profit financial think tank, sought to address this issue by introducing six new definitions of greenwashing in January to demonstrate how certain marketing claims can potentially mislead consumers and investors. These terms include green-crowding (hiding behind alliances or amongst peers to avoid scrutiny), green-lighting (drawing attention to a small green feature to distract from negative environmental impacts elsewhere), green-shifting (shifting the blame onto the consumer), green-labelling (misleading marketing tactics), green-rinsing (continuously changing ESG targets before they are achieved), and green-hushing (underreporting or refusing to disclose sustainability credentials to avoid investor scrutiny).
Providing context to better understand the types of greenwashing can help companies comply with regulatory requirements. Additional context will also enable companies to target their compliance efforts to mitigate the risk associated with greenwashing.
Signs of Progress
The global discourse surrounding greenwashing shows that awareness is growing. Investor desire for effective regulations must work in concert to encourage companies to continue promoting their environmental initiatives. If regulatory frameworks are too onerous, financially burdensome, or inconsistent with each other, companies may be disincentivized to invest in sustainable business products and services.
With the increasing demand for environmental impact transparency from ESG investors, consumers, and governments, companies will continue to grapple with disclosures and the varying requirements of the global marketplace. It is thus important that companies work closely with legal counsel and key stakeholders to successfully navigate the various global regulatory frameworks and related developments.