Greenwashing: Meaning, Examples, Risks and How Companies Can Avoid It

Introduction

As environmental, social and governance (ESG) considerations become increasingly important to investors, customers, employees, regulators and business partners, companies are under growing pressure to demonstrate their sustainability credentials.

This has created an important business risk: greenwashing.

Greenwashing occurs when a company, product, investment fund or organisation presents itself as more environmentally responsible or sustainable than its actual performance, evidence or practices justify.

Greenwashing is not simply a marketing problem. It can affect brand reputation, investor confidence, regulatory compliance, access to capital, customer trust and long-term business value.

Regulators around the world are increasingly focusing on misleading environmental claims. In the European Union, new consumer-protection rules prohibit vague environmental claims such as describing products as “green” or “environmentally friendly” without appropriate substantiation, with the rules applying from September 2026. In the United States, the Federal Trade Commission’s Green Guides address how environmental marketing claims should be substantiated and qualified.

For Indian companies, particularly listed entities preparing ESG disclosures, BRSR information and sustainability communications, avoiding unsupported claims is becoming increasingly important.

1. What Is Greenwashing?

Greenwashing is the practice of creating a misleading impression that a company, product, service, project or investment is environmentally beneficial or sustainable.

The misleading impression can arise through:

• Exaggerated environmental claims
• Selective disclosure of positive information
• Failure to disclose material negative impacts
• Unsubstantiated carbon-neutral claims
• Misleading use of environmental labels
• Ambiguous words such as “green” or “eco-friendly”
• Overstating the benefits of recycling
• Presenting a small environmental improvement as a major transformation

A company does not necessarily have to make a completely false statement to create a greenwashing risk. An incomplete, ambiguous or misleading statement can also create a false impression.

2. Why Has Greenwashing Become a Major ESG Issue?

Sustainability has become commercially valuable.

Consumers may prefer sustainable products. Investors may consider ESG risks when allocating capital. Banks may incorporate sustainability factors into lending decisions. Large companies may evaluate suppliers using ESG criteria.

This creates an incentive for organisations to communicate their environmental achievements.

The problem arises when communication moves faster than actual performance.

For example, a company may advertise that it is becoming “carbon neutral” while its underlying emissions continue to increase and the claim depends heavily on offsets without adequately explaining the basis of the claim.

This can undermine the credibility of the entire ESG ecosystem.

3. What Are the Most Common Forms of Greenwashing?

Greenwashing can take several forms.

1. Vague environmental claims

Words such as:

• Green
• Eco-friendly
• Sustainable
• Environmentally safe
• Natural
• Clean
• Earth-friendly

can create broad impressions without explaining what environmental benefit is actually being claimed.

The U.S. FTC advises marketers against broad, unqualified environmental-benefit claims because they can be difficult to substantiate.

2. Cherry-picking information

A company may highlight one positive environmental achievement while ignoring a significant negative impact elsewhere.

For example, a company may highlight renewable electricity used at its offices while remaining silent about substantial emissions from its manufacturing operations.

3. Misleading carbon-neutral claims

A company may claim “carbon neutral” without clearly explaining:

• Its actual emissions
• Reduction achieved through operations
• Use of offsets
• Quality of offsets
• Permanence of reductions
• Reporting boundary
• Verification

Carbon claims require particularly careful documentation.

4. Misleading recycling claims

A product may be described as “recyclable” even though suitable recycling infrastructure is unavailable to most customers.

The FTC Green Guides specifically address recyclable claims and the need for appropriate qualification where recycling facilities are not sufficiently available.

5. Misleading certifications

A company may display a sustainability logo or environmental certification without clearly explaining:

• Who issued it
• What was assessed
• What standards were applied
• Whether the entire product or only one attribute was assessed

Third-party certification does not automatically eliminate the company’s responsibility for the claims it communicates.

4. What Is Greenwashing in ESG Reporting?

Greenwashing is not limited to advertisements.

It can also occur in:

• Annual reports
• Sustainability reports
• BRSR disclosures
• Investor presentations
• Websites
• Social media
• Product packaging
• ESG presentations
• Fund documents
• Sustainability-linked financing communications

For example, if a company highlights a reduction in electricity consumption but fails to explain that production volumes also fell substantially, stakeholders may receive an incomplete picture.

Good ESG reporting should therefore provide context, methodology, boundaries, comparable data and supporting evidence.

5. Greenwashing vs Genuine Sustainability

The difference is fundamentally about the relationship between claim and evidence.

A strong sustainability strategy should be capable of surviving detailed questions from investors, auditors, regulators, customers and employees.

6. What Are Examples of Greenwashing?

Consider a hypothetical company that says:

“We are a zero-carbon company.”

But the company:

• Has significant Scope 1 emissions
• Has not measured Scope 3
• Uses offsets for most of its claimed reductions
• Has no credible transition plan
• Does not disclose the methodology

The statement may create a misleading impression.

A more responsible communication would explain the company’s actual emissions, reductions, renewable-energy use, offsets and remaining emissions.

Another example is a product advertised as:

“100% eco-friendly.”

Such a statement is extremely broad.

A more precise claim could identify the specific attribute being measured—for example, a defined percentage of recycled material—provided the company has reliable evidence supporting the claim.

7. What Are the Risks of Greenwashing?

Regulatory Risk

Misleading environmental claims may attract regulatory scrutiny depending on the jurisdiction and applicable laws.

The EU has strengthened consumer protection against vague environmental claims, while U.S. environmental marketing claims are subject to general truth-in-advertising principles and FTC guidance.

Reputational Risk

Once stakeholders lose trust in a company’s sustainability statements, rebuilding credibility can be difficult.

Financial Risk

Greenwashing can affect:

• Investor confidence
• Cost of capital
• Customer demand
• Business partnerships
• Financing opportunities
• Share valuation

Litigation Risk

Misleading claims can potentially result in legal disputes, depending on the jurisdiction, claim and affected stakeholders.

ESG Rating Risk

Inconsistent or unreliable ESG data may also affect how external ESG rating providers assess a company.

8. Why Greenwashing Is Dangerous for Investors

Investors need reliable information to assess companies.

Suppose two companies report similar ESG scores, but one has provided significantly more complete and verifiable information while the other has relied on selective communication.

Investors may not be comparing equivalent information.

Greenwashing can therefore contribute to:

• Mispricing of ESG risks
• Incorrect investment decisions
• Poor capital allocation
• Unexpected regulatory exposure
• Reputational losses

This is why investors increasingly need to look beyond ESG headlines and examine the underlying data.

9. What Is Greenwashing in ESG Funds?

Greenwashing can also occur in sustainable investment products.

A fund may be marketed using terms such as:

• ESG Fund
• Sustainable Fund
• Green Fund
• Climate Fund
• Responsible Investment Fund

Investors should examine:

• Investment strategy
• Exclusion criteria
• ESG methodology
• Portfolio holdings
• ESG data sources
• Engagement policy
• Voting policy
• Impact objectives
• Measurement methodology

A fund using ESG terminology does not automatically mean that every investment in the portfolio creates a positive environmental impact.

10. How Can Companies Avoid Greenwashing?

Companies should establish a formal ESG Claims Management Framework.

Step 1: Define the claim

Before making a sustainability statement, clearly identify what the company is claiming.

For example:

Instead of:

“We are a sustainable company.”

Use:

“We reduced Scope 1 and Scope 2 emissions by X% compared with the defined baseline year.”

The second statement is more specific and measurable.

Step 2: Identify supporting evidence

Every significant environmental claim should have supporting documentation.

Evidence may include:

• Energy records
• Emission calculations
• Supplier information
• Waste records
• Renewable-energy certificates
• Product lifecycle data
• Independent assessments
• Certifications

Step 3: Establish boundaries

A sustainability claim should clearly identify what is included.

For example:

• Which facilities?
• Which subsidiaries?
• Which products?
• Which reporting period?
• Which emissions scopes?

Step 4: Explain the methodology

Companies should document how the figure or claim was calculated.

This is particularly important for:

• Carbon footprint
• Emission reductions
• Renewable energy
• Carbon offsets
• Recycled content
• Water savings
• Waste reduction

Step 5: Obtain internal review

Environmental claims should not be created solely by the marketing department.

Relevant functions should include:

• Sustainability
• Finance
• Legal
• Compliance
• Risk management
• Internal audit
• Operations

Step 6: Consider independent assurance

Where appropriate, independent assurance can improve confidence in ESG information.

Assurance does not replace management responsibility, but it can strengthen data reliability and internal controls.

11. What Role Does the CFO Play in Preventing Greenwashing?

The CFO has an increasingly important role.

Sustainability claims are increasingly connected with:

• Financial reporting
• Capital expenditure
• Operating costs
• Risk management
• Investment decisions
• Financing
• Business valuation

The CFO should ensure that sustainability claims are consistent with financial and operational realities.

For example, if management announces a major decarbonisation programme, the CFO should understand:

• Required investment
• Expected savings
• Carbon impact
• Implementation timeline
• Financial assumptions
• Risks
• Measurement methodology

12. What Role Can CA and CMA Professionals Play?

CA and CMA professionals are well positioned to help companies reduce greenwashing risk because ESG increasingly depends on measurement, controls, accounting, assurance and decision-useful information.

Their responsibilities can include:

CA Professionals

• ESG reporting controls
• Assurance
• Risk assessment
• Disclosure review
• Governance
• Compliance
• Investor reporting
• Sustainability-related financial disclosures

CMA Professionals

• Environmental cost accounting
• Carbon cost measurement
• Energy-cost analysis
• Sustainability budgeting
• Cost-benefit analysis
• Resource efficiency
• Internal carbon pricing
• ESG performance measurement
• Management dashboards

Together, finance professionals can help convert sustainability claims into measurable and auditable business information.

13. How Can MSMEs Avoid Greenwashing?

MSMEs may not have sophisticated ESG departments, but they can still adopt good practices.

An MSME should:

1. Avoid unsupported “green” claims.
2. Maintain basic energy and fuel records.
3. Measure important emissions where practical.
4. Document waste management.
5. Maintain supplier information.
6. Clearly explain environmental certifications.
7. Use specific rather than vague claims.
8. Keep evidence supporting marketing statements.
9. Avoid claiming carbon neutrality without proper assessment.
10. Review sustainability claims before publication.

A small company does not need a complicated ESG system to communicate responsibly.

It needs accurate information and disciplined documentation.

14. Greenwashing Prevention Checklist

Before publishing an environmental claim, management should ask:

Claim

• What exactly are we claiming?
• Is the claim specific?

Evidence

• What evidence supports the claim?
• Is the evidence reliable?

Scope

• What products, locations or operations are covered?
• What is excluded?

Time Period

• What is the reporting period?
• What is the baseline year?

Methodology

• How was the result calculated?
• Which emission factors or standards were used?

Comparability

• Compared with what?
• Has the methodology changed?

Communication

• Could a reasonable customer or investor misunderstand the claim?
• Are important qualifications clearly visible?

Governance

• Who approved the claim?
• Is there a documented review process?

If these questions cannot be answered, the claim should be reconsidered.

15. Greenwashing and the Future of ESG

The ESG environment is moving from claims to evidence.

Stakeholders increasingly want to know:

What did the company actually achieve?

rather than simply:

What does the company say about sustainability?

This shift will increase the importance of:

• ESG data governance
• Internal controls
• Carbon accounting
• Supply-chain data
• Independent assurance
• Board oversight
• Sustainability-linked KPIs
• Transparent methodologies

Companies that build reliable ESG systems will be better positioned to communicate their performance confidently.

16. Key Takeaways for Businesses

Greenwashing is not merely the use of an incorrect environmental statement.

It can also arise from:

• Ambiguity
• Exaggeration
• Selective disclosure
• Missing context
• Unsupported assumptions
• Misleading comparisons
• Poor-quality data

The best defence is therefore not simply better marketing.

It is better ESG management.

Companies should measure their performance, establish clear methodologies, maintain supporting evidence, implement internal controls and communicate their achievements honestly.

Conclusion

Greenwashing can undermine trust in both individual companies and the wider ESG movement.

As sustainability becomes increasingly integrated into investment, regulation, finance and business strategy, companies will face greater expectations to substantiate their environmental claims.

The winning approach is simple:

Measure what matters.
Document the evidence.
Disclose the methodology.
Avoid exaggeration.
Communicate transparently.

For CFOs, Chartered Accountants, Cost and Management Accountants, auditors, investors and business leaders, preventing greenwashing is becoming an important part of building credible and sustainable businesses.

The future of ESG communication will belong not to the companies that make the biggest sustainability claims, but to those that can prove them.

The Worldonomics Times – ESG Knowledge Series