14 June 2024
Is Greenhushing as damaging as Greenwashing?
Greenwashing’s scale is complex and evolving; it can take numerous forms and varies in scope and severity. Greenwashing and greenhushing may be at opposite ends of the spectrum, but are they part of the same problem?
Clearly, any manipulation of a company’s sustainability reporting, in whatever guise, places that business at an increased risk of litigation and regulatory action.
Companies may have genuine reasons for under-reporting their green credentials. The main one is the fear of being asked for reams of data, which could place considerable resource pressure on smaller companies. Other companies may be reluctant to stick their heads above the parapet due to the regulatory costs associated with affirming green credentials.
As KPMG notes, reporting on ESG is fast becoming a business norm akin to financial reporting. However, its infancy means it does not yet necessitate the same well-trodden precision and detail. Nevertheless, the pressure is on, as any discrepancy in this area is potentially harmful to investors, customers, employees and anyone who relies on this information to make decisions.
Greenhushing may not be as obviously dishonest as other forms of greenwashing, but it does limit the quantity and quality of publicly available information. If companies deliberately withhold information, then there is a lack of transparency, which impacts stakeholders' ability to analyse climate targets, share best practices, and calculate scope 3 emissions accurately.
If companies deliberately withhold information it impacts stakeholders' ability to analyse climate targets, share best practices, and calculate scope 3 emissions accurately.
Risks for directors and officers
D&O underwriters are interested in determining a good ESG risk, but the complexity surrounding greenwashing suggests that this process is far more challenging than initially thought. There is no consensus on what a good ESG risk looks like, but this will likely change over the next two to three years as companies respond to upcoming legislation and develop best practices.
But what about the here and now? Recent Gallagher research found that one in five (21%) of the 600 respondents cited litigation as their primary concern should they miss their ESG targets.
ESG has been discussed as an emerging risk for some time, but it is clear from this research and Gallagher’s own claims experience that both social and environmental litigation have arrived; they are no longer simply on the horizon. Good ESG risk selection is not as simple as calculating a company’s carbon footprint due to practices like greenwashing and greenhushing.
Steve Bear, Executive Director of Financial and Professional Risks at Gallagher, says: “It is interesting to think about how the situation may develop over the next few years as, to date, so little has been codified around what businesses must do in terms of ESG. It’s all been left to best endeavours and practice, which creates a significant margin for error. The recent judgment against Dutch airline KLM is a good example of this in action.”
In July 2022, environmental activist Fossielvrij filed a civil suit against KLM over its 2019 “Fly Responsibly” campaign. KLM said the campaign showcased its commitment to a sustainable future, but Fossielvrij argued there is no such thing as sustainable flying. In March, an Amsterdam court ruled that KLM had broken the law with misleading advertising in 15 out of 19 environmental statements it assessed. Fossielvrij said the ruling sets an important legal precedent with implications for the entire aviation industry.
Steve says, “KLM’s actions are likely to have very little to do with corporate greed and much more with a desire to do the right thing, and that is what makes ESG so subjective. If you look at any corporate website now, commitments to sustainability and environmental and social impact will likely be visible on the homepage. Everyone is trying to do the right things, but where they are falling down is where they are scared of litigation and meeting ESG targets.”
In October, a report released by ESG data firm RepRisk claimed the number of greenwashing incidents committed by banks and financial institutions had jumped by 70% over the last 12 months. It added that a majority of the greenwashing is related to claims made regarding fossil fuels. However, the European Banking Federation said the report was based on allegations rather than verified claims of greenwashing.
“Any business promoting a service or product related to ESG is at some point going to have to justify that label, and this will inevitably lead to investigations, litigation, fines and penalties,” Steve continues. "The new regulations may feel like a tightrope for businesses, with more things to fall foul of, but without them, we are left with the Wild West of the past few years.”
Recent Gallagher research found that one in five (21%) of the 600 respondents cited litigation as their primary concern should they miss their ESG targets.
Steve Bear
Executive Director
Just as we have highlighted that ESG reporting is set to become more like the rigours of financial reporting, businesses must approach ESG issues in a similar way to tried and tested business risks while at the same time recognising that political pressure on ESG is a risk in and of itself.
Along with the growing complexity of greenwashing, D&O expert Kevin LaCroix argues that ESG has tried to carry the weight of too many social, business, and financial goals. He asserts it would be better if the three pillars were detached and considered separately. However, the wealth of regulation and legislation surrounding ESG means that it will be a collective hot topic for businesses for the foreseeable future, and they must prepare for the challenges this brings.
To help avoid the negative risks associated with poor management of ESG, including over or understating green credentials, businesses should consider undertaking an independent ESG assessment. These provide data-driven insights into the perception of a company relating to material ESG matters and how this may give rise to legal or regulatory exposures affecting the company and its directors and officers. Steve concludes: “Looking beyond ESG factors, an independent ESG assessment will include clear guidance on actionable risk reduction measures. The resulting roadmap to improvement can drive a much better result when it comes to D&O insurance renewals, be it lower premiums, improved policy terms and conditions, or even bursaries and contributions from insurers to help implement positive change.”
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