Sustainability claims and consequences: a changing landscape

08 November 2023, Micha van den Boogerd

Why airing your dirty laundry could brighten your reputation

With revelations about fashion manufacturer Patagonia still fresh in their memory, many company directors are worried about accusations of corporate greenwashing, with the potentially damaging impact on their company’s reputation. Investors and asset managers are likewise uneasy about dipping their toe into the water, if they are unsure of how to accurately spot greenwashing in mergers or acquisitions.

In the ever-changing landscape of responsible investing, our blog series on transactions and responsible investment services serves as a guide to navigating the complexities and uncovering strategies for sustainable growth.

In our first blog article, we examined the significance of PAI statements under SFDR in building trust through compliance. In this second blog, we turn our attention to the pervasive issue of greenwashing, exploring the risks it poses and the strategies to combat it. Join us as we delve deeper into these topics and stay tuned for future articles on the EU Taxonomy and the SFDR.

Prevent a greenwashing stain

In the not too distant past it was relatively easy for businesses to make sustainability claims without implication or consequences. That is changing fast, as the example of Patagonia has shown. The outdoor clothing brand – considered a frontrunner in sustainability – was accused of greenwashing, after it was revealed that its products were manufactured in the same factories used by fast-fashion brands, where working conditions are poor.

Avoiding an accusation like that and calculating the risks of it happening to you is crucial, if you want to safeguard your company’s reputation. But aside from social acceptance there is a second reason to be vigilant -  increasingly stringent regulations.

Compliance and reputation

So companies face risks from two sides. And if you want to ensure your business operations are future-proof, you will need to address both the reputational and compliance risks. You can no longer get away by just addressing one.
The compliance risk is relatively easy to mitigate and can even be eliminated altogether, although that is a tough job in itself. But what about the reputational risk? How can you prevent greenwashing claims? Well, here’s the crunch: reputational risk is impossible to avoid.
There are often only certain regions in the world where companies can source their materials from, or where their products can be manufactured. Often the source countries lack a regulatory framework. So unless you are a niche player with an exclusive supply chain, there is often no way to avoid doing business with less regulated countries.

Nailing a moving target

That begs the question, what can you do? What you should do is start with proper due diligence. Look at your own corporate standards, as a starting point. Be sure to observe legal standards, of course. But also don’t forget your own industry standards. Some countries have no or a poor regulatory framework in place so the best you can do is to take your own industry standards and best available practices as a starting point. Simply focusing on legal compliance won’t cut it in terms of reputation.

Circumstances change and opinions on what is right or wrong evolve. Therefore, if you operate in a global playing field, you need to adhere to what is commonly acceptable. And that is a moving target. Take the participation of women in the workforce. Different countries have different rules, so if you adhere the local rules your reputation will be fine, right? Wrong. If you want to be on the safe side and minimise reputational risk, use the UN and your industry standards as a minimum.  The same goes for hazardous waste  - if there are no regulations in place, follow responsible stewardship practices.

For investors, buyers or vendors of assets, it is important to conduct due diligence on reputation and compliance issues. In short, for anything that could be material. And that materiality changes based on location. Where materiality in a logistics warehousing in the Netherlands is limited to contaminated land, permitting, climate and energy, in another country that might include working conditions. Failing to include that in scope might not technically be called greenwashing, but it is certainly a risk to any stakeholder.


Transparency is the best policy

Public opinion aside, lenders and stakeholders want to know how your business is run. And they have a right to know. Credibility and transparency are key in that respect. And they are inextricably linked. There are financial repercussions for failing to set or to report on credible targets or to know what your impact is. Of the two, transparency is perhaps most important. What is right today might be wrong tomorrow. It is unclear what data may be needed in future and which data will be used to determine impact changes. So if you want to improve your performance, you need to know the data, be adaptable, and start collecting as much data as possible. Perhaps you will need to switch to another KPI. Anything is better than not knowing and not showing.

Companies who want to avoid reputational risk and accusations of greenwashing will do well to report on more than the legal minimum. If you only adhere to the minimum of what you need to this year, you run the risk of not being credible few years on.
That might be a bitter pill to swallow. Particularly for some production companies who are reluctant to disclose data on their emissions or substances of high concern, now that scope 3 emissions increasingly being shown in the industry. But transparency is your friend.
What can you do? Look for alternatives in terms of products or for questionable practices; make it a business target to look for alternatives. And be transparent about it.

Bottom line

While risk to your company's reputation is unavoidable, you can take steps to reduce and mitigate potential consequences. Do your due diligence and be transparent, even if you are not fully compliant yet and about lacking or unreliable data. Effort and transparency will be rewarded. If you want your company to be future-proof, you will need to stretch yourself a bit. How much of a stretch fits you, is the question. We can help you answer that question. Give us a call!

More about Transaction and Responsible Investment Services

Sustainability has become a strategic imperative facing investors and asset managers; it's the new currency of value creation. Want to know more about Transaction and Responsible Investment Services? Click on the button below for our detailed TRIS information webpage.

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Blog 1 | Building Trust through Compliance: A Closer Look at PAI Statements under SFDR

In recent years, regulations for sustainability reporting have become more stringent and the pressure to comply with these standards has intensified. The Sustainable Finance Disclosure Regulation (SFDR) imposes mandatory reporting on a range of ESG topics.

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