VW Scandal Just the Tip of the Greenwashing Iceberg

The Federal Trade Commission joined the Environmental Protection Agency earlier this month in launching a probe into Volkswagen’s line of “clean diesel” cars. While the violations of the Clean Air Act being investigated by the EPA could cost the automaker as much as $18 billion, any fines resulting from the FTC investigation, which only covers false or misleading advertising claims, are likely to be paltry. That, combined with the rarity of regulatory action in cases of deceptive or fraudulent environmental claims, may contribute significantly to the popularity of greenwashing, according to Vanessa Burbano, an assistant professor of management at Columbia Business School.

The Volkswagen scandal, deriving from the installation of “defeat devices” designed to cheat emissions tests in 11 million vehicles, is one of the more extreme examples of greenwashing — claiming positive environmental performance when the reality is the opposite. But the practice has become remarkably widespread in recent years. According to a 2010 report by TerraChoice, 95 percent of “green” products on the market include at least one false or questionable claim.

“There’s a lot of demand now for green products and firms among consumers and investors who are becoming more interested in social and environmental performance,” explains Burbano, who has researched the topic. Indeed, the UK Department for Business, Innovations and Skills estimated the global consumer market for green products and services to be a whopping $5.2 trillion in 2012. “These things create a demand for good environmental performance — and if you have poor environmental performance, there’s a temptation to pretend that that’s not the case.”

And firms have little incentive to tell the truth. In the past 20 years, the FTC has pursued action against corporations for false or misleading statements about environmental performance just 41 times. While there’s been an uptick in regulatory action since 2009 — all but two of the cases have occurred within the past six years — present regulations have little bite.

If the FTC finds that a company has made unfair or deceptive claims about a product, under Section 5(a) of the FTC Act it can issue a cease-and-desist order, as well as fines of up to $16,000 per violation or one year in prison. It’s often difficult, however, for the government to make its case as firms are not required to divulge environmental performance information, and many green terms — such as “biodegradable” and “all-natural” — remain only vaguely defined.

Further, “regulation is even less clear with respect to big, multinational firm with practices all over the world,” Burbano says. “What a firm does in certain countries is not under the purview of the United States. Even if the US had stricter guidelines and regulations, if a company has significant operations that aren’t based in the US, it’s possible that even those stricter regulations wouldn’t do much to deter greenwashing. That just adds to the regulatory complexity.” Critics of the pending Transpacific Partnership and Transatlantic Trade and Investment Partnership have argued that the two trade deals could further undermine consumer protections by making it easier for corporations to sue governments that seek to bolster environmental standards that interfere with business.

As a result, many corporations are simply willing to risk it, Burbano says. “Firms likely perceive the risk of being punished by the FTC for engaging in greenwashing practices as very low on average,” she and Magali Delmas of UCLA write in a 2011 paper in the California Review of Management. Larger, more profitable firms are also “better able to withstand bottom-line shocks” of being caught, including reputational damage, FTC fines, and litigation costs.

Continuation of wide-spread greenwashing and high-profile cases like VW’s could erode consumer confidence in claims of environmental responsibility, dampening the market for such products. “Even for the firms that may be legitimately working on their environmental performance,” Burbano explains, “other firms’ greenwashing increases scrutiny on them and decreases the trust that consumers will have in them.”

To combat wide-spread greenwashing, Burbano argues, clearer regulations and stiffer penalties are needed. As she and Delmas write in their report: “The threat of exposure would have much more of a deterrent impact on greenwashing if there were legal ramifications for being ‘caught’ and exposed.”

Regulatory action alone, however, is unlikely to fully curb the practice. For that, businesses themselves must take steps to better align incentives with performance, and to become more transparent. “If managers are rewarded for their environmental communication counts, and that could lead them to just check these boxes without really looking into or thinking about what’s actually going on,” Burbano explains.

Greater transparency on environmental performance, including voluntary disclosure by firms, may have the strongest effect, however. “If enough firms are voluntarily disclosing, the fact that you aren’t would raise questions,” Burbano says. “Once you have firms either reporting data that they were compelled to report or because they’re voluntarily reporting, then you actually have something to hold them to. Nonprofit organizations and watchdog organizations would have something to hold them accountable for.”