You probably know about “greenwashing.” But are you familiar with “greenhushing”?
“Greenwashing” is an accusation that activists, investors and other stakeholders levy when they believe a company’s sustainability and environmental proclamations and disclosures lack credibility, meaning they are not supported by facts and underlying data. “Greenhushing” is a deliberate attempt to avoid greenwashing allegations by under-communicating or otherwise publicly reporting as little as possible regarding progress toward climate objectives (e.g., advancing toward longer-term net zero goals in silence).
Either of these accusations is the last thing a CFO wants to hear concerning the “E” in their organization’s ESG-related reporting and business practices.
Accusations of greenwashing and greenhushing, which have increased over the past year, fall squarely on the CFO, who must respond quickly and decisively when they arise. As certifying officers of public companies and the de facto purveyors of data at organizations of all kinds, many CFOs are charged with governing the environmental data and analyses in financial statements and ESG reports — this includes data access, inspection and review for accuracy. That said, a growing collection of other information and communications created throughout the enterprise — including RFP (requests and responses), third-party risk questionnaires, employee surveys, insurance documentation, lending applications and more — contain disclosures of ESG-related data and assertions that CFOs may not see, let alone have an opportunity to review.
CFOs should assume that activists, shareholders and other stakeholders can get their hands on any organizational communication transmitted to an external party. With this in mind, finance leaders should act now to reduce greenwashing risks, which can result in reputation loss, brand erosion, and fines or penalties.
Why act now? Because the threat landscape is only intensifying. Last October, the CEO of a large global bank resigned after authorities raided one of the bank’s subsidiaries due to fraud suspicions related to greenwashing. Just this month, a group of institutional investors publicly accused BP of backing off its previously disclosed 2030 emissions reduction target. In recent weeks, an environmental law firm (and Shell Oil shareholder) sued the energy company’s board of directors for mismanaging climate risk. The claimant also asserted that Shell’s energy transition strategy does not align with goals tied to Scope 3 emissions reductions within the 2015 Paris Agreement.
These incidents reflect a larger trend of heightened investor activism, especially actions targeting larger organizations. Axios reports that companies with annual revenues of more than $500 million were targeted by a record number of activist investor critics last year. The smart bet is that activist activity will not subside any time soon.
Further, many companies appear ripe for greenwashing accusations, according to a 2022 Google Cloud/Harris Poll global survey of more than 1,400 executives. The survey results “showed a troubling gap between how well companies think they’re doing [with progress on climate-related goals], and how accurately they’re able to measure it.” Only 36% of respondents reported that their organizations have measurement tools in place to quantify sustainability efforts reliably. More concerning: 58% of respondents indicated that their organization has overstated its sustainability efforts. The view on the horizon doesn’t look good.
Reducing the likelihood of greenwashing and greenhushing accusations requires CFOs to engage with the sustainability strategy-setting process and strengthen and expand the data governance and controls around all of their organization’s climate-related reporting and information-sharing. Awareness of greenwashing risks represents a crucial first step; other proactive measures include the following five actions.
Engage the End-to-End Process
While greenwashing entails disclosure risk, greenhushing is more about strategy-setting and having confidence in the ability to deliver on sustainability targets previously shared with investors. To that end, CFOs should engage with others in formulating the organization’s climate risk strategy, determining the appropriate targets to communicate to the street, designing the processes and metrics for measuring progress against established targets, and defining the protocols for the extent and frequency of public disclosures.
Mitigate Greenwashing Risks Today
As just one example, CFOs of U.S.-based companies should resist the temptation to wait for the SEC’s imminent rules on climate-related disclosure requirements. As recent regulatory and legal actions in the EU and the U.K. demonstrate, few, if any, companies are immune to greenwashing allegations. It is less costly to avoid the potentially substantial fallout from these accusations than it is to put mechanisms in place now to avoid them. Targets to which the company has committed should be reviewed. Measurement methodologies should be evaluated. Disclosure practices should be scrutinized. And all three should be strengthened.
Be Prepared to Address the Board’s Greenwashing Concerns
Few boards of directors are waiting for regulators, investors and other stakeholders to weigh in on the company’s climate-related reporting and actions. As greenwashing accusations unfold in the marketplace, expect directors to put tough questions to CEOs and CFOs regarding the organization’s ability to mitigate this risk.
Extend Greenwashing Scrutiny Beyond Financial Statements and Public Disclosures
Before issuing climate-related disclosures, CFOs must cull data from a diverse collection of sources, including operations (concerning production and materials, upstream suppliers and logistics, transportation and distribution channels, and more), HR (business travel), third parties (firms that specialize in calculating or providing greenhouse gas emissions data), and other stakeholders. To limit the risk of greenwashing accusations, finance leaders also need to identify climate-related information the organization shares with insurers, banking partners, customers, employees, and other third and fourth parties. In addition, CFOs should make sure that environmental pronouncements in these communications align with the organization’s public climate disclosures and core ESG values. They can rest assured that external parties are likely checking this alignment, as well.
Expand Internal Communications and Fortify Disclosure Controls
Judging by the substantial extent of voluntary ESG disclosures already being made (even without the new SEC rules), it is clear that many finance chiefs already work closely with investor relations, legal, compliance and sustainability partners to transform climate data into relevant metrics. For sure, it is a team effort. But now, these collaborations need to extend to more business partners — including insurance brokers, sales teams, procurement groups, treasury groups that provide lending documentation to banks, and others—who exchange any climate-related and/or ESG information with external parties. Internal controls related to data accuracy and governance also need to be installed in areas of the business that produce and share climate-related data and information.
It was only a year or so ago that many boards and CFOs were focusing on the higher-level question of whether ESG matters were integrated into business processes or merely window dressing. Today, the creation and transmission of climate-related data has become integrated into more business processes, including those that involve communications and information exchanges with outside parties, raising the stakes when it comes to greenwashing and greenhushing risks. These issues make it imperative for CFOs to extend their rigorous oversight of climate-related disclosures beyond the financial statements and ESG reports to also include external and internal communications throughout the rest of the enterprise.
As CFOs do so, they should keep in mind that activist investors, regulators and NGOs will be dissecting these same communications for evidence of greenwashing. And if they find it, they will act.
This article originally appeared on Forbes CFO Network.
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