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The UK ‘Greenwashing’ Briefing Series: PART II

By Rodrigo Zepeda, CEO, Storm-7 Consulting 

[Part II of a four part blog series] 

In order to gain a better and more in-depth understand of greenwashing, it is helpful to first venture beyond mere definitions and to look at what it may entail, as well as its impact on financial investments in practice. In the United States (US), at the beginning of 2010 it was identified that professionally managed assets that employed socially responsible investment strategies (which included environmental performance), were valued at $3.07 trillion (Delmas and Burbano 2011, p. 64). These types of green investments were not new – in 1995 there was already approximately $639 billion placed in such investments identified in the US (Delmas and Burbano 2011, p. 64).

Even as far back as 2011, it was acknowledged that more and more firms were actively engaging in greenwashing practices, and that this “skyrocketing incidence of greenwashing”, could have highly profound negative effects on both consumer confidence in green products, and investor confidence in environmentally friendly firms (Delmas and Burbano 2011, pp. 64-65). As such, if you are the government of a country, clearly these were not the types or size of investments that you should have been ignoring. 


At that time, it was contended that the limited and lax regulatory environment, combined with uncertain enforcement, were key drivers of greenwashing in the US (Delmas and Burbano 2011, p. 65). These drivers of greenwashing were identified as being split across three levels, namely external drivers, organisational drivers, and individual psychological drivers:


(a) market external drivers (consumer demand, investor demand, competitive pressure);

(b) non-market external drivers (lax/uncertain regulatory environment, monitoring activities by activists, the media, and non-governmental organisations (NGOs));


(a) firm characteristics;

(b) effectiveness of intra-firm communication;

(c) incentive structure and culture;

(d) organisational inertia;


(a) optimistic bias;

(b) narrow decision framing;

(c) hyperbolic intertemporal discounting;

(Delmas and Burbano 2011, p. 68).

The application of these drivers in practice was identified as being context sensitive. For instance, market external drivers might act heavily within a particular industry (e.g., retail textile industry), which might force certain types of firms in competition with each other to adopt green practices because other competing firms had already done so. If Starbucks implements a range of green and environmentally friendly policies for its services and products, these may pressure other coffee stores and food stores to implement simliar policies to prevent possible loss of customers.

In fast-moving industries, this can lead to green and environmentally friendly policies being adopted rapidly by firms to keep up with market competition, but which may not fully reflect operational facts. In parallel, the lax and uncertain existing regulatory environment impacted upon greenwashing, because firms tended not to fear enforcement activities by regulatory authorities.

However, activists, the media, and NGOs might heavily influence the greenwashing activities of certain firms within certain industries owing to a greater risk of public exposure of potential greenwashing activities, and any attendant negative reputational damage that might materialise. At an organisational level, the characteristics of firms such as size, industry, profitability, resources, and competencies undoubtedly influenced greenwashing activities.

Certain larger listed firms fell under greater public scrutiny, whilst other firms were situated in industries that were subject to lighter regulatory requirements. Firms might succumb to greenwashing activities because their internal intra-firm communications and channels were ineffective, or because the incentive structure and culture of the firm facilitated questionable ethical practices, e.g., sale of green products directly linked to employee bonuses which may misalign firm incentive structures. In addition, key senior management individuals within firms might exhibit types of:

(1) optimistic bias (i.e., over-estimation of probability of positive events, under-estimation of probability of negative events);

(2) narrow decision framing (i.e., tending to make decisions in isolation); or

(3) hyperbolic intertemporal discounting (i.e., preference reversals that may generate inconsistencies in short-term behaviour and long-term objectives);

that may lead to greenwashing practices.

Optimistic bias greenwashing could lead to the forecasting of future green outcomes based on underlying success scenarios whilst failing to take into account sufficient failure scenarios as well. Narrow decision framing greenwashing may reflect a green claim that is based on a narrow set of attributes, such as a claim that paper is environmentally preferable because it comes from a sustainably harvested forest, but fails to account for greenhouse gas emissions or use of chlorine in the bleaching process (de Freitas Netto et al. 2020, p. 8). A practical example of hyperbolic intertemporal discounting greenwashing can be seen in the Volkswagen emissions scandal, i.e., focus on short-term communications on environmental issues whilst discounting long-term impact (Hotten 2015; Plungis 2015).

Overall, this type of structural analysis highlighted the inherent underlying complexity of greenwashing practices, as well as moderating drivers, and identified that greenwashing goes far beyond simply false or misleading advertising. At the very least, it demonstrated that greenwashing practices needed to be investigated and examined in much greater depth at a national level, and especially within the evolving field of ‘ESG’ (Environmental, Social, Governance) investing.

This national policy impetus became even more acute with the promulgation of the United Nations (UN) Sustainable Development Goals in 2015. It was at this time, that the financial technology (FinTech) and regulatory technology (RegTech) industries started to grow and rapidly expand in the United Kingdom (UK). As will be further discussed later, this was therefore the ideal point in time which the UK Government should have started to significantly focus on investigating and developing key greenwashing regulatory strategies.


Over time, the harmful effects of greenwashing have been identified, and include inter alia:

(1) increased consumer distrust and scepticism (acts as a barrier to responsible consumption);

(2) the creation of conditions for unfair competition and free-riding behaviours (prevents differentiation of responsible behaviour, inhibits innovation); and

(3) preventing mobilisation of ethical consumers towards contributing to green policy objectives (hinders achieving these policy objectives) (2° Investing Initiative 2021, p. 13).

However, greenwashing in financial investments poses even more problems. First, there is the attribution problem, that is, that applying ‘attribution logic’ to the finance sector is highly challenging (2° Investing Initiative 2021, p. 8). Attribution logic in an environmental consumer purchase decision is presumed to be based upon logical steps – a purchase is made based on a green claim which reflects a product feature, and which materialises in a green benefit (2° Investing Initiative 2021, p. 8).

For example, a consumer purchases an environmentally friendly car based on a green claim that the car reduces carbon emissions, and so the consumer can analyse the car’s carbon emissions features to evaluate the tangible environmental benefit (2° Investing Initiative 2021, p. 8). The process is logical and is based on causal attribution at each step of the purchase decision. However, this attribution logic process tends to break down when analysing long-term environmental investments.

This is because environmental effects are generally multiple, complex, and non-linear, and there is very little research that provides empirical support for substantiating environmental impact claims, i.e., investors have to rely on investment strategy theories proposed by asset managers instead (2° Investing Initiative 2021, pp. 9-10). In short, there is a lack of empirical evidence currently available to show/prove that these investment strategy theories actually work as they are intended to work in the long-term.

This causes problems in the attribution logic process that may be applied to evaluating green investments. As noted by the UN: 

“…one important factor is that investors do not have the tools to make the investments they need––they lack information and data necessary to measure activity and hold companies accountable for their social and environ-mental behaviour.” (UN 2020, p.1).  

Other problems arise when constructing investment portfolios marketed as green. One feature of popular climate strategies adopted by asset managers is that they improve the ‘greenness score’ of a portfolio, e.g., weighted average emissions (Amenc et al. 2021, p. 4). Although asset managers may use such scores extensively to attract investors, it has been contended that increasing a portfolio’s greenness score may not actually encourage firms to reduce emissions, e.g., via direct impact of allocation on cost of capital, or via signalling channels (Amenc et al. 2021, p. 4).

Amenc et al. (2021, pp. 4-5) argued that problems that arose in practice included: (1) that climate scores represented, at best, 12% of determinants of ESG portfolio stock weights on average; (2) it is actually very easy to display greenness by under-weighting high emissions sectors; and (3) a portfolio’s greenness score will not account for individual firm dynamics. These three areas, namely non-materiality of climate considerations, inconsistency of stock-level signals, and underweighting of key industries, therefore together represented significant shortcomings in green portfolio investments by introducing a range of greenwashing risks in climate investment strategies (Amenc et al. 2021, p. 52).

Examples of marketing tricks that fund managers might employ, include citing environmental benefits that are not completely supported by solid factual evidence; alluding to best-in-class ESG performance when at best performance impact may be very indirect and unmeasurable; and suggesting implemented ESG investment processes will directly achieve actual environmental outcomes not supported by the evidence (2° Investing Initiative 2021, p.31).

This brief analysis highlights that green investment strategies and financial investment portfolios can potentially be easily strategically manipulated in practice, which can result in de facto greenwashing of investments that may be difficult for investors to objectively assess. What is more, by some accounts, such greenwashing practices and tactics have been identified as being widespread. For example, a survey of impact-related claims by green themed funds carried out by the 2° Investing Initiative (2DII), found that 85% of such funds made unsubstantiated and misleading impact-related claims that violated existing marketing regulations (2DII 2019, p.4; Hay 2019).



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Rodrigo Zepeda

Rodrigo Zepeda


Storm-7 Consulting Limited

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25 Oct 2019



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