REVEALING THE FAULTLINES: THE PERILS OF CORPORATE GREENWASHING IN INDIA'S ESG LANDSCAPE
Updated: May 23
Author: Tejaswini Kaushal
Second-year law student at Dr. Ram Manohar Lohiya National Law University, Lucknow
At the fag end of November 2022, when the concept of Environmental, Social, and Governance (“ESG”) was thoroughly enjoying the importance of being a primary corporate gadget to please environmentalists and customers, the Sembcorp controversy in Singapore highlighting the phenomenon of “Green Washing” stole the spotlight once more. With the sole aim to smokescreen their damaging activities under the garb of being environmentally friendly, Sembcorp's statements of sustainability were claimed to not match up to the reality of their actions, such as installing oil rigs in biodiverse areas and using unsustainable fishing practices. Sembcorp conglomerate, through such Green Washing tactics, mooched off $697 million from investors willing to accept a lower rate of return through green bondsfor the perceived environmental benefits of the project. Several other global brands, like Volkswagen, H&M, Windex, Nestlé, Coca-Cola, Starbucks, IKEA, etc., have faced the brunt of such accusations, and this phenomenon has not spared India from its contentious clutches either.
On November 24, 2022, the Securities and Exchange Board of India (“SEBI”) had issued a circular (“1st Circular”) introducing and regulating green debt securities, a concept that promotes environmental sustainability through the financing of green projects at lower servicing rates. Further, to regulate Green Washing and reduce it, the SEBI has recently released a circular on February 3, 2023, namely ‘Dos And Don’ts Relating To Green Debt Securities To Avoid Occurrences Of Greenwashing’. In light of the same, this article attempts to uncover the cracks in the facade of “green” business practices, explore its prevalence in the Indian industry, examine the dangers of corporate Green Washing, analyse the recent circulars by SEBI, and suggest measures to ensure greater accountability from corporate entities.
II. What is meant by “Green Washing”: Exposing the Faultlines
As consumers and investors become increasingly aware of the importance of sustainability, companies are eager to position themselves as environmentally responsible and socially conscious, however, the growing focus on ESG has also led to a rise in “Green Washing”. SEBI in its circular has defined Green Washing as “making false, misleading, unsubstantiated, or otherwise incomplete claims about the sustainability of a product, service, or business operation.” In India, corporate Green Washing in ESG has become a significant issue as companies increasingly seek to position themselves as responsible and sustainable businesses.
ESG is not a novel concept but has found the limelight in corporate governance over again, and rightly so. The major issue related to corporate Green Washing in ESG in India includes a lack of specific regulations in India that govern the use of environmental or sustainability claims by companies. It functions under the scope of Corporate Social Responsibility under Section 135 of the Companies Act 2013, consequently affected by the shortcomings of the legislative and administrative framework governing the Companies Act.
Further, the current legislative structure also includes the penal provisions under Section 17 of the Consumer Protection Act, 2019, which provides protection and compensation for consumers against false or misleading advertisements by defining it as an ‘Unfair Trade Practice’. Furthermore, the Advertising Standards Council of India (“ASCI”) Code lays down guidelines for advertising, including restrictions on misleading advertisements and requires advertisements to be truthful, honest, and not deceptive. Additionally, the Environmental Protection Act 1986 provides for the protection and improvement of the environment, stipulating corporate liability under Section 16 and imposing penalties for offences under Section 15.
Under these legislations, companies are held liable to fines, imprisonment, revocation of license and/or ban on the products, services or advertisements on exercising of rights against such malpractices of Green Washing. For instance, the ASCI banned Bharat Petroleum’s advert claiming “Go Green With Speed For IT Reduces Emissions” for unsubstantiated environmental claims in 2017. In such cases, a company’s brand image can be severely impacted, which leads to a loss of revenue and credibility, bringing in a deterrence effect to please the market forces.
Unfortunately, since redressal is to be sought under separate channels and under several categories, the fragmentation in regulation makes it easier for companies to make misleading claims and place false labeling endorsing their environmental or sustainability practices, preventing consumers from making informed purchasing decisions. For instance, Hindustan Unilever Limited (“HUL”) faced allegations of making false ecological claims regarding its Surf Excel laundry detergent. The advertisement showed the product being effective while suggesting that the product is environmentally friendly and gentle on clothes. However, the product was claimed to contain harmful chemicals that can damage the environment and human health, eventually causing the advertisement to be banned and a heavy fine charged from the company.
Moreover, another major prevalent shortcoming is posed by “Undeclared Trade-Offs” when companies claim to be environmentally responsible but simultaneously engage in practices that have negative environmental impacts. For example, a company may claim to be carbon-neutral by offseting its use of fossil fuels in its operations, yet at the same time engage in excessive mining to extract those fossil fuels leading to irreparable environmental damage. The lack of transparency and limited disclosure about their environmental or sustainability practices further makes it difficult to assess their actual environmental impact.
III. Unpacking the New Guidelines: An In-Depth Look at the Government's Latest Measures for improved ESG compliance
On February 3, 2023, the SEBI released a circular (“2nd Circular”) detailing the instructions to companies to restrain from Green Washing through green debt securities. It is primarily motivated by the poor state of environmental affairs in India, reflected in the Yale University's Environmental Performance Index 2022, where India was ranked at last place out of 180 nations.
This 2nd Circular mandates companies to provide accurate, verifiable, and transparent details about their environmental impact. Additionally, the circular also requires companies to make their ecological targets publicly available and to ensure that the issuer refrains from falsification of third-party certification. Furthermore, a subsequent circular dated February 6, 2023 (“3rd Circular”) provides for appointment of a recognised third-party agency to review the concerned project, eligibility, and issue of green debt securities.
This should reduce the occurrences of Green Washing and encourage companies to be more transparent about their sustainability efforts. The government has also recently undertaken an intricate 16000 crore outlay for mobilising sovereign green bonds, and also have previously issued guidelines in place for companies to adhere to when marketing their products and services, ensuring that they are not making false claims about their environmental impact or sustainability efforts.
The 3rd Circular also outlines the requirements for the information disclosure on the sustainability objectives and about the use of proceeds from the issuance of each green-labelled security. This will help ensure they are used only for their intended purpose and not otherwise. It is a much-needed step by the government to proactively address and regulate Green Washing, clarify the domains of ambiguity that it poses, and enforce accountability for its environmental impact.
IV. Narrowing the Fault lines: Recommendations for a Stronger Indian ESG Landscape
To ensure increased accountability, SEBI introduced new ESG Reporting Requirements in 2021 for the top 1,000 listed companies in the country based on their market capitalization, which required these companies to disclose their ESG performance through a new format called the Business Responsibility and Sustainability Report (“BRSR”). However, subsequently, the ESG risk assessment findings by CRISIL reflected the ill effects of keeping reporting through BRSR optional for FY 2021-22. It revealed that a dismal one-fifth of the 586 Indian companies included in the study had published their sustainability report. This underscored the importance of companies reporting on their ESG performance, especially as India aims to achieve its net zero target by 2070. Thus, the BRSR reporting has been made compulsory for the FY 2022-23, which assures enhanced compliance in the future.
Yet, more than mere reliance on the mandate for issuing ESG reports, promotion, and ensuring of widespread adoption of ESG practices by corporates in India iS needed. To better address this issue, the government must set precise standards and regulations for companies to adhere to regarding their environmental and social performance, with internally-driven “corporate governance” being the key. Additionally, companies should be encouraged to engage in meaningful dialogue with stakeholders, including civil society organisations and investors, to ensure that they take significant action to reduce their environmental and social impacts. Furthermore, organisations should be incentivised through tax concessions or subsidies to proactively maintain funds to invest in research and development for cultivating sustainable products, services, and technologies that can help reduce their environmental and social footprint. Lastly, companies should be held accountable for Green Washing or failing to meet their sustainability commitments; not only through government-imposed penalties but also by conscientious investors and consumers diverting their buying power and undertaking investment decisions to reward companies that prioritize ESG practices and divesting from those that do not.
V. Analysis & Conclusion
It is indubitable that reducing Green Washing is crucial for the growth of sustainable corporate practices and for protecting consumers from fake, green-coated claims. The circulars issued by SEBI for green debt securities is a crucial step forward in the right direction, but it only addresses a specific aspect of the problem. There are still a plethora of shortcomings that await appropriate address and regulation by the government.
There lies an exigent need for a robust legal framework to ensure that companies that make inaccurate environmental claims are held accountable and face significant penalties to cause a deterrence effect. Additionally, there is a need for better consumer education and awareness about the issue of Green Washing and how to identify it. Overall, while the SEBI guidelines are a step forward, there is still a long way to go in reducing Green Washing and promoting genuine sustainability in corporate functioning.
Note: This article has been reviewed and edited by Mr. Anish Jaipuriar at Stage- II.