Research: How Some Companies Avoid Accusations of Greenwashing

Research: How Some Companies Avoid Accusations of Greenwashing

By Matt Dallisson, 09/10/2023

Sustainability has rapidly become an indispensable part of corporate governance. But as companies commit to green practices, a worrying trend is also surfacing: Some corporations are painting themselves as green while failing to back their claims with concrete actions. Numerous examples abound: The UK Advertising Standards Authority (ASA) has recently banned a number of ads from prominent companies, including HSBC for being “misleading” about efforts to tackle climate change. The ASA also banned the ads of Ryanair for the company’s unsubstantiated claim of being Europe’s lowest emissions airline.

In addition to regulators, companies that project an unsubstantiated green image are also being called out by investors, and consumers, who may punish such “greenwashing” through penalties, divestment, boycotts, or even protests. Yet, our recent research suggests that some companies may be engaging in similar behavior while escaping, to a certain degree, scrutiny and sanctions.

We found that a certain type of firm — specifically, a firm that sits atop of what is known as a Business Group (BG) — seems to largely avoid scrutiny for greenwashing. BGs are prevalent yet understudied entities across the globe in both developing and developed economies, accounting for much, if not the majority, of economic activity in countries as varied as India, Korea, Turkey, and Chile. Each BG is essentially a web of affiliate companies that typically span multiple industries, share resources, and are interconnected through both equity holdings and social ties. The firms in a BG are typically coordinated by a core or apex firm that is often the top corporate owner. Our research reveals a curious dynamic within these arrangements: we found that apex firms are able to report on the sustainability efforts of their lower-tier affiliates “for free,” i.e., without substantiating them with their own actions. And they can do this without incurring the greenwashing label.

To shed light on this phenomenon, we analyzed data from 515 publicly listed companies that are members of BGs across 35 different countries. Specifically, we obtained environmental, social, and governance (ESG) data from Refinitiv (formerly ASSET4) which measures each company’s ESG performance relative to its industry peers, relying on company-reported information. We used it to distinguish between a company’s substantive sustainability actions (i.e., those related to socially responsible policies and programs) and symbolic ones (i.e., reporting, claims, or disclosures). The gap between these two sets of actions was our measure of the extent to which companies decouple “talk” from “action.”

We found that apex firms engaged in fewer substantive sustainability actions despite communicating sustainability at similar levels to their lower-tier affiliates. Put differently, these firms systematically “advertised” more than they actually “did” relative to other group members. Adding another layer to this dynamic, we observed that apex firms sharing a brand name with their affiliates engaged in even fewer substantive sustainability actions compared to apex firms that did not have a shared name. Unfortunately, the equity markets appear to extend some tolerance towards this particular type of greenwashing by apex firms compared to their lower-tier affiliates.

What explains this discrepancy? It’s possible that what might be perceived as blatant greenwashing elsewhere could be interpreted as a legitimate division of labor in the unique BG ecosystem. Apex firms, using their influential role and symbolic power, can act as “communicators,” that amplify the group’s overall sustainability initiatives; lower-tier affiliates, in contrast, take on the role of “implementers,” substantively implementing these initiatives.

This may provide a short-term advantage to apex firms who essentially attempt to free-ride on the global sustainability movement. However, it’s vital to recognize that the markets’ tolerance of apex firms’ apparent greenwashing does not absolve them of their responsibilities. Eventually, greenwashing may severely damage long-term reputation and erode stakeholder trust. Leaders should seize upon this understanding as an opportunity to bolster their sustainability practices and reporting. Indeed, our study has important implications for managers, not just within BGs but, more broadly, within firms that are affiliated to others (e.g., through alliances and joint ventures).

Be honest about sustainability efforts.

Overstating sustainability efforts can severely backfire if a gap between rhetoric and reality is exposed. Like the way in which one affiliate’s good reputation reflects well upon the whole group, so would a greenwashing scandal reflect poorly beyond the affected affiliate. Leaders should therefore ensure that public communications about sustainability accurately reflect the group’s actual practices. They should report on and rectify potential discrepancies between sustainability actions and communications. Additionally, establishing comprehensive monitoring through external assurance services can promote transparency and accountability, reducing the chance of perceived greenwashing.

Motivate sustainability among affiliated firms through a shared identity.

Leaders of apex firms should not solely rely on their coordination abilities within the group to ward off perceptions of greenwashing. They also benefit from being the source of a group identity — that includes core values and principles — that can and should be used to mobilize group members towards achieving long-term sustainability. In fact, many BGs do this through appeals to their history. For instance, Japan’s Sumitomo group builds upon its 400-year-old founding principles (the “Sumitomo Spirit”) about mutual prosperity and respect for the public good to motivate its sustainability efforts.

Share sustainability best practices and talent.

Managers at apex firms should not only report on the sustainability efforts carried out by other affiliates, but also diffuse them across the group affiliates. Managers can leverage the well-developed internal HR networks within BGs to recruit personnel adept at corporate sustainability practices or develop teams that can identify and diffuse sustainability actions throughout the group. One example of this is the Tata Sustainability Group (TSG), a team of the apex firm Tata Sons that has the “mission to guide, support and provide thought leadership to all Tata group companies in embedding sustainability in their business strategies.” In other words, extending the communication role of apex firms towards internal stakeholders can help develop groupwide substantive sustainability strategies.

Be mindful of evolving stakeholder expectations.

The business world is rapidly shifting, and stakeholders’ expectations for sustainability are no exception. Ignoring this evolution can strain relationships with essential stakeholders, including customers, employees, and investors. Leaders should strive to stay in tune with their expectations and make sure their commitment to sustainability is transparent and genuine.

In the end, the pursuit of sustainability is not a marketing gimmick, but a commitment that demands substantive, long-term action. A strong group identity may provide some protection for apex firms within BGs, but beneath it, the audience, the stakeholders, and indeed the world, are demanding substantive, not just symbolic, actions. Particularly in the context of BGs and similar organizational setups, any reputational damage is likely to spill over to the entire group of firms, severely damaging the entire organizational ecosystem. Therefore, over the long run, companies will consistently benefit only through a sincere commitment to sustainable practices.

This content was originally published here.