How can regulators stop the deceptive practice of greenwashing without violating firms’ right to free speech? Wharton professor Sarah E. Light explains why this question is so difficult to resolve and what legal steps are being taken to protect the public from false and misleading environmental claims.
What Is Greenwashing?
Dan Loney: Can you give us a definition of greenwashing?
Sarah Light: Greenwashing is this umbrella expression that refers to situations in which an entity is publicly making statements about its environmental impact or the environmental impact of its products or services that are not actually borne out by the evidence. It could be a directly false claim like, “This product is 50% recycled material,” when there’s no recycled material in it. Or it could be more vague: “Our product is all-natural.” We don’t really know what that means. There are many different other forms. But what’s really important to understand about greenwashing is that it can refer not only to a product or a service, it can also refer to efforts to paint the entire firm as being more environmentally conscious than it is. I think that is the way in which it has been coming up a lot more recently.
Loney: What piqued your interest about greenwashing?
Light: I’m a professor in the Legal Studies and Business Ethics Department. My interest in the intersection of business and environment relates primarily to the legal rules and the legal and policy environment that addresses the ways in which firms interact with the environment. Greenwashing is this really interesting case because not only has it been coming up more and more as firms are becoming more aware that their stakeholders want them to be more environmentally friendly or aware, but it has raised questions about how we need to think about enforcement and how we can prevent firms from misleading members of the public, be they consumers or investors or regulators, about the bona fides of their environmental marketing claims.
That’s the big-picture answer about why I’m interested in this topic. The most specific answer is that in the last few years, there has been a shift in the way that greenwashing has entered the public consciousness. For many years, it was really about product-based claims. You know, “This product contains recycled material,” when it doesn’t. Or, “This product is non-toxic,” but it’s toxic. But over the past few years, firms have increasingly been making claims about their environmental impact as a whole, or their climate impact.
For example, more than a thousand firms in the past few years have made public statements or commitments that they’re going to get to net-zero greenhouse gas emissions by 2050. Some of those claims may be real and backed by evidence, and others may be just puffery and trying to go along with the flow. What piqued my interest was situations in which the firm is trying to characterize itself or its business as making a transition to a net-zero by 2050 world, when many of the firms are continuing business as usual.
Loney: How prevalent is greenwashing?
Light: I think it’s really hard to tell. The prevalence depends very much on what your definition is, and this is the hard part. When you think about certain terms, like “assault” or “murder” or “fraud,” those terms have legal definitions. A court can say, “Is this fraud? Is it a material misrepresentation of fact that caused harm?” Greenwashing is not a legal term of art. Greenwashing is the word that we all use when we feel deceived. You might have a much broader definition of greenwashing than I do, or I may have a broader definition than you do.
When I teach the topic of greenwashing to my students, I give them a set of examples that are based on real-life cases. I ask them, “Is it greenwashing or is it not greenwashing?” Of the six examples that I give, two of them are at the very extreme ends. On one extreme, everybody’s hand goes up, “Yes, this is definitely greenwashing.” And on the other extreme, not a single hand goes up, “Definitely not greenwashing.” But in the middle, it’s really hard to know. Part of the reason why is because there can be directly false claims where either it’s factually true or factually not true, and you can test it — like the content of a product. But then there are misleading ones, like a major fossil fuel company having an ad that highlights its investments in renewable energy. Those investments are real, but those investments comprise less than 1% of the entire business. So, it’s trying to create an impression or a halo effect that may be misleading as customers or investors are thinking, “Should I buy this stock or that stock? Should I go fill up my tank at this gas station versus that gas station?” It affects consumer choices in the marketplace, as well as investor decisions.
Loney: How does the First Amendment factor into the issue of greenwashing?
Light: The reason why I think the First Amendment comes into play here is because since 1976, the Supreme Court has protected not only political speech but also certain forms of commercial speech, as long as that commercial speech is truthful and accurate and not deceptive or misleading.
Before 1976, there was essentially no protection. You couldn’t say, “I have a First Amendment right to advertise for my business.” A state could say, “No, your lawyers cannot advertise,” and that wouldn’t pose a First Amendment problem. But beginning in 1976, the court basically said, “Even commercial speech is protected.” The reason why the Supreme Court decided to protect commercial speech like advertising or marketing claims is not based on the autonomy of interest of the speaker. It’s not about the Chevron’s autonomy to say what it wants in the marketplace. It’s about you and me and our interests in the marketplace in ensuring that there is accurate, factual information so that we can make choices in the marketplace, and we can make choices about how we want to regulate the marketplace.
How Corporate Greenwashing Impacts the Bottom Line and Hurts Consumers
Loney: When you think about misinformation, there are so many areas of the marketplace that it could impact, from bottom-line benefit to the company to its shareholders to the public.
Light: Absolutely. We know from empirical research, some of which has been done by my Wharton colleagues, that marketing information about firms can have an impact in two primary ways. The first is on the consumer. There is one study that demonstrates a halo effect for products produced by a firm that engages actively in corporate social responsibility. Participants in this study were provided information about Firm A donating money to X cause, and then they were asked to rate a hair regrowth product, a tooth whitener, and an optical character recognition text scanning program. How white are the teeth? How much hair grew back? How clear is the scan?
Another group of participants were asked to rate the same products but were given no information about donations by the firm. The participants who learned that the firm had engaged in corporate social responsibility rated the teeth as whiter, the text as clearer, and the hair as fluffier. This is a really clear demonstration of a halo effect. There are other studies that demonstrate that when consumers learn that a firm makes product X using renewable energy or in some other environmentally conscious way, they attribute that environmental consciousness to the firm’s other products. There’s kind of this halo of greenness that comes about. If I’m making a choice in the marketplace about whether to purchase from Firm A or Firm B, and I find out that Firm A is using renewable energy, I might buy from Firm A. If that’s true, then I’m making a good choice. If that’s greenwashing and the firm isn’t using renewable energy, or they’re only using it in some really limited way, but they’re hyping it up in their advertising, then I’m being misled, and maybe I would have chosen the other product. So, it distorts voices in the marketplace.
The second major impact relates to our role not as consumers, but as voters. There are a number of studies that show that there are policy spillovers in both directions. On the one hand, there is the negative policy spillover, meaning studies have shown that when participants learn that all firms in an industry are studying targets that they’re going to use recycled materials in their products, they’re less likely to support public regulation on the same subject matter, largely because of this impression that the firms have got it under control.
On the flip side, there are also studies that show that certain segments of the population may be more likely to support public regulation when they learn that a firm has taken action. My favorite study in this regard is one done by faculty at Northwestern University, who showed participants information about either California using cage-free eggs or McDonald’s using cage-free eggs in their supply chains. Then they disaggregated the participants by political affiliation. What they found was that if you’re on the liberal side of the spectrum, it didn’t really matter that much if you learn that California or McDonald’s was using cage-free eggs. You were generally supportive of laws against battery cage egg production. Whereas people who identified as “very conservative,” when they learned that California was purchasing only cage-free eggs, they weren’t super supportive of public policy. They were like, “Those tree-huggers, they’re going to do what they want. Crazy California.” But when conservatives learned that McDonald’s was purchasing cage-free eggs, they were as supportive of public policy on cage-free eggs as liberals.
Why? Maybe if a major corporation thinks that this is an issue, as well as if a major corporation thinks that it can do this consistent with its profit-maximizing goals, then this is really a problem. So, if I am a conservative, I am more likely to trust it if McDonald’s thinks it’s a problem than if the State of California thinks it’s a problem. There’s an impact also on the interest of members of the public to regulate the problem.
Loney: There’s a component of trust involved in that messaging, especially when you’re talking about the government versus a corporate entity.
Light: Yes, absolutely. And I think that’s pretty well established. There’s this concept of “source credibility.” Depending upon how I self-identify, whether it’s as a matter of partisan politics or as a matter of other identity-based characteristics, I may find certain sources more credible. I might find the State of California more credible than the U.S. military. Someone might find the U.S. military more credible than McDonald’s. You can see where it goes based upon different values that we hold or different factors that play into our identity.
The way in which the First Amendment begins to come into play is because the First Amendment is a limit on what the government can do. The First Amendment basically says, “I have a right not to be bothered by the government, not to be told what to do by the government in certain types of regulation.” If we’re thinking about what we want to do to prevent or deter or punish greenwashing, the First Amendment sets the outer boundaries of what legal institutions like the Federal Trade Commission or the states or the Securities and Exchange Commission can do to either require disclosure of environmental information or to allow the government to sue a firm for a false or misleading statement.
Can Policymakers End Corporate Greenwashing?
Loney: How much of a role do you think social expectation can play in changing the mind of a company around some of these issues?
Light: I actually think it’s playing an important role in multiple ways. At one level, there’s the organized social movement that’s boycotting Company X for not doing more on environmental or social issues. Or there’s the organized movement on the other side boycotting the company that’s doing too much.
At a more disaggregated level, there are empirical studies that show that consumers have expressed a greater willingness to pay for products that are more environmentally friendly. I have colleagues at Wharton who have said, and I think they’re right, that as soon as we begin to live in a world in which the marketplace values environmental friendliness, we’re likely to see not only genuine environmental friendliness, but also greenwashing. Because with some of them, it may be completely benign, right? They’re seeing all of their industry competitors announcing these pledges, and they’re like, “Oh, we’ve got to do something.” They don’t necessarily know quite what to do. They make the pledge, and they’re not quite ready to support it with the facts. But if they can get on the bandwagon, then nobody is going to be upset. And then there’s the really intentional efforts to mislead.
Loney: What do you think needs to occur to get more of an accurate picture of what companies are doing?
Light: As a lawyer, it’s very important to me to work in at least one or two Latin phrases during our conversation, and so here they are: We have the ex ante, and we have the ex post. Ex ante means before the fact; ex post means after the fact. Often when we think about something like greenwashing, we think about ex post. Who can sue the company when they’ve published the misleading ad? That would be the Federal Trade Commission, which has power under the Federal Trade Commission Act to go after companies that are engaged in deceptive marketing practices that affect commerce. The FTC has published something called the “Green Guides,” which are its interpretation of how that statute applies to environmental marketing claims. And the FTC just a couple of months ago requested comments on how it needs to update the guides. It hasn’t updated them since 2012. I will be submitting some suggestions.
But at the end of the day, that’s ex post. There was an ad. Somebody thinks that it’s misleading. The FTC sues and seeks a cease-and-desist order to take down that ad and pay a penalty. The ex ante approach is the one that I think is probably more important and more effective. And it’s the one embodied in the Securities and Exchange Commission on mandatory disclosure of ideas.
Last year, the SEC published a proposed rule on climate disclosures that would apply only to publicly traded companies. It basically said that in their annual periodic reports, they need to disclose their greenhouse gas emissions. If they have made a public commitment to reduce emissions, they need to disclose how they intend to achieve that goal. Do they plan to use carbon credits and offsets, etc?
The SEC issued a proposed rule and has accepted comments on the rule. It got many, many comments and is now working its way through them. We’re anticipating that sometime this spring, the SEC is going to publish a final rule, which will immediately be litigated in the courts, so it’s not going to come into effect immediately.
But the idea of disclosure — and I’m a big fan of disclosure – is if we’re putting more accurate, factual information out into the marketplace, not only does that deter companies from putting false or misleading information into the marketplace, but it also gives us a better handle on what companies are actually doing in a way that we can maybe do a better job of judging when claims are false or misleading.
Loney: Do you think we are on the right path in terms of making a significant change in this area?
Light: I think that if the SEC does go forward with this disclosure rule, my understanding is that the final rule will probably be narrower than the proposed rule, based on the comments. But we’ll have to see. I think that it will be a step in the right direction. I think that it’s really, really hard for regulators to catch up with marketing. Regulators have to go through these long and tortured processes to publish a proposed rule, and then accept comments, and then a final rule. In the meantime, more and more claims are being made about the greenness of our industries.
Whether it will stamp out the problem, I don’t know. But I think it’s a definite step in the right direction, and probably a better one than just expecting that either the Federal Trade Commission or the states, which have similar powers, are going to go after every advertisement. That’s a very laborious process.