Exposing greenwashing: Fighting deceptive sustainability claims

Consumers should be critical and make informed decisions, as it is essential to look for specific evidence to support environmental claims 


GREENWASHING as defined by the International Organisation of Securities Commissions (IOSCO) refers to the practice of misleading consumers or the public about the environmental benefits of a product, service or company’s practices as it involves making false or exaggerated claims about sustainability or ecological friendliness to improve public perception and gain a competitive advantage. 

Some companies often use ambiguous and misleading terms like “eco-friendly”, “green”, or “sustainable” without providing specific details or evidence to back up their claims, making it difficult for consumers to determine the true environmental impact of a product or service. 

Also, some companies display certifications or labels that are not directly related to environmental performance that can give off the impression of sustainability without providing any substantial evidence. 

Greenwashing also often involves making claims without providing data or evidence to support them, including unsupported claims of carbon neutrality, environmental benefits or misleading statistics. 

One notable instance is the highly publicised “diesel dupe” controversy involving Volkswagen AG, which led to the global recall of millions of vehicles. 

The company initially claimed that its cars were equipped with innovative clean diesel engines that complied with the US’ emission standards. But it was later discovered that Volkswagen had manipulated the engine software to deceive emissions tests. 

Fast-forwarding five years since the scandal’s revelation, Volkswagen is still grappling with immense financial repercussions, along with legal expenses, damage to its reputation, and a significant decline in stock value. 

Speaking to The Malaysian Reserve (TMR) on the issue, Bank Muamalat Malaysia Bhd chief economist and social finance head Dr Mohd Afzanizam Abdul Rashid said there is yet to be a unified approach to combat the issue. 

Mohd Afzanizam said that to have a standard unified approach, the risks could only put more burden in terms of regulatory compliance, which could eventually incur additional costs for the practices.

“Perhaps we could be more balanced and not too fixated on having environmental compliances (in reference to environmental, social and governance, or ESG). As for awareness, the public should have a better understanding so that they can differentiate as to who can walk the talk when it comes to this issue,” he told TMR. 

At the end of the day, he said it all goes back to the clients’ or consumers’ due diligence. 

The original use of the term ESG can be traced back to 2004 when the then-United Nations (UN) secretary general Kofi Annan invited leaders of financial institutions, institutional investors, asset managers, global consultants, government bodies and regulators to participate in an international conference. 

The event, jointly hosted by the government of Switzerland and UN Global Compact and International Finance Corp, aimed to integrate ESG into capital markets. This resulted in a study entitled “Who Cares Wins: Investing for Long-Term Value” (2005). The study sets out the business case for embedding ESG issues into investment decisions, thereby improving the sustainability of financial markets and leading to a better outcome for society. 

In a nutshell, ESG criteria are a set of metrics to assess a company’s operations by socially conscious investors to screen potential investments based on corporate policy, and to also encourage investee companies to be good corporate citizens. The ESG criteria metrics help investors to evaluate any ESG risks a company might face and how the company is managing those risks. 

Here, one of the areas that the government and regulatory bodies can focus on to address the greenwashing risks is the availability of the data, as well as high-frequency coverage on the matter. 

“For example, in the economics sphere, we have the data on imports and exports trade every month. Perhaps, we can have the types of carbon emissions emitted by certain industries that need to be regularly updated on a high-frequency basis,” Mohd Afzanizam said. 

To identify and combat greenwashing, consumers should be critical and make informed decisions as it is essential to look for specific evidence, such as third-party certifications, transparent reporting, and verifiable data, to support environmental claims. 

Additionally, conducting independent research and seeking information from reliable sources can help distinguish sustainability efforts from greenwashing practices. 

Addressing greenwashing risks in Malaysia requires a collaborative effort from regulators, businesses, consumers and civil society. Malaysia can take significant steps towards combating greenwashing and promoting sustainability by implementing robust regulatory frameworks, enhancing transparency and reporting, promoting consumer education and fostering responsible investment practices.

On the capital markets front, the Securities Commission Malaysia (SC) unveiled in December 2022 the principles-based sustainable and responsible investment taxonomy for the Malaysian Capital Market (SRI Taxonomy) to help advance the nation’s climate and sustainability agenda. 

The SRI Taxonomy provides universal guiding principles for the classification of economic activities that qualify for sustainable investment. 

It aims to give clarity towards enabling proper and consistent identification and classification of various types of economic activities, as well as the definition of sustainable investments. It also seeks to address concerns on the need to mitigate and manage the risks of greenwashing, according to an SC statement. 

“The global expansion of sustainable investments has created demand for additional clarity and assistance for market players in identifying economic activities that are aligned with environmental, social and sustainability objectives,” said the SC chairman Datuk Seri Dr Awang Adek Hussin. 

“The SRI Taxonomy adopts a principles-based approach to enhance the standardisation and comparability of sustainable investment assets,” he said. “This was done after considering the state of readiness of the wider Malaysian capital market, as the capital market constituents are at different maturity levels in their sustainability journey.” 

  • This article first appeared in The Malaysian Reserve weekly print edition