Environmental sustainability has become a cornerstone of modern corporate responsibility. Yet, a troubling trend lies beneath the glossy reports and bold claims: greenwashing, a way for companies to build a fake eco-friendly image.
Greenwashing is more than just misleading marketing. It’s a sophisticated strategy that undermines genuine sustainability efforts and erodes trust in corporate environmental commitments. As investors, consumers, and other stakeholders become more discerning, understanding the different forms of greenwashing has never been more important. The Securities and Exchange Commission has brought enforcement actions exposing these deceptive practices but only on a case-by-case basis. In a new article, we propose a comprehensive framework that relies on blockchain to systematically classify varieties of greenwashing.
Our article identifies six major types of greenwashing:
- Misconduct: Companies manipulate data or environmental efforts to present false claims in their environmental disclosure.
- Selective Disclosure: Companies strategically omit crucial environmental information that could negatively impact their sustainability image.
- Misclassification: Companies inaccurately categorize non-sustainable activities as eco-friendly or bundle them with genuine sustainability efforts to inflate their overall green profile.
- Hollow Promise: Companies make environmental commitments without taking substantial action to fulfill them.
- In Name Only: Companies set up sustainability-focused departments or committees that have no real impact or function.
- Misleading Presentation: Companies use impression management tactics in disclosures to influence stakeholders’ perceptions of their environmental image.
Effective action against greenwashing requires a system that ensures transparency, accountability, and traceability, a role perfectly suited to blockchain.
Technological Solutions
Blockchain, a decentralized, tamper-resistant, and transparent digital ledger, offers an ideal foundation for recording sensitive data like environmental disclosures. Smart contracts, self-executing programs embedded in blockchain, add another layer of control by automating rules and validations. Together, blockchain and smart contracts provide a robust method for managing the six types of greenwashing through automated controls and the preservation of audit evidence.
Smart contracts constrain managers’ discretion by automating checks on environmental events or transactions before information is recorded. Once in place, smart contracts become immutable, ensuring that managers cannot modify the rules. When data meet these stringent controls, the blockchain faithfully logs critical information, such as source documents and corporate actions. Internal stakeholders (like managers and employees) and external stakeholders (like suppliers, customers, investors, NGOs, and activists) can verify this logged information. Auditors and regulators can review this stored data, using it as dependable evidence to identify potential greenwashing. Moreover, auditors can evaluate the frequency of greenwashing, differentiating between occasional and repetitive incidents.
Potential Applications
- Misconduct: Automate data collection and storage and use preset rules to detect manipulation of environmental data.
- Selective disclosure: Document all environmental-related activities and information to be on blockchain.
- Misclassification: Preset rules in smart contracts for verifying classes of environmental transactions.
- Hollow promise: Continuously monitor environmental-related investments and performance and compare with companies’ targets.
- In Name Only: Monitor the activities of environmental departments or units posted on blockchain and identify inactive units.
- Misleading Presentation: Identify repetitive recordings of the same activities on blockchain.
The article shows that using blockchain and smart contracts makes fighting greenwashing more transparent, accountable, and timely. Companies can prevent misconduct by using sensors to collect environmental data and having experts conduct spot checks. This data can then be automatically uploaded via smart contracts to a blockchain, making it unalterable. For instance, Hino Motors’ falsification of emissions data[1] could have been avoided by installing sensors in trucks, having experts verify them before tests, and automatically sending results to the blockchain, blocking any later tampering. Smart contracts could also verify whether sensors have been replaced.
For example, recent SEC enforcement actions include charges against Compass Minerals International for misleading investors about operational conditions at the world’s largest underground salt mine.[2] In the Compass Minerals case, experts could have compared reports against immutable blockchain recording and marked discrepancies as red flags. Deterring greenwashing requires collaborative efforts, such as managers overseeing operations, board ESG committees supervising management, auditors conducting independent checks, and regulators like the SEC or EPA performing unannounced inspections.
Selective disclosure can be addressed by recording all environmental activities on the blockchain. Sensors would automatically upload data based on rules set by regulators. Auditors could then compare blockchain records with environmental reports and any gap. Consider, for example, recent SEC enforcement charges against Vale S.A. for misrepresenting dam safety risks before a fatal collapse.[3] The missing safety risk information in environmental disclosure would be discovered if such information were automatically recorded on the blockchain.
Misclassification can be prevented by smart contracts that verify categories before data are posted. Auditors can trace transactions on the blockchain to confirm correct classification, such as checking if equipment purchases truly support clean energy.
Hollow promises can be identified by using smart contracts to track whether environmental metrics match targets and alert auditors to deviations. Auditors can measure goal completion using blockchain data and monitor changes to targets over time.
Monitoring the activities of environmental-related committees posted on the blockchain, validated by auditors with external data, can expose committees that are inactive. Smart contracts can also prevent misleading duplication of activities in records.
Finally, blockchain enables broad stakeholder oversight. Activists, locals, or NGOs can review public environmental data and report discrepancies, supporting crowdsourced monitoring of greenwashing.
Contributions to Key Stakeholders
The suggested solution generates distinct governance benefits for multiple stakeholder groups. For regulators, it provides a technological basis for more precise environmental disclosure guidelines, continuous monitoring, and risk-based detection of corporate environmental misrepresentation. For auditors, the combination of smart contracts and immutable audit trails enhances assurance by enabling earlier detection of inconsistencies, standardized evidence collection, and longitudinal analysis of greenwashing patterns. Lawyers may use blockchain-generated evidence in environmental compliance cases. For market participants, including investors, consumers, and NGOs, greater transparency also empowers more informed assessments of corporate environmental performance and enables more effective mechanisms to hold corporations accountable.
Conclusion
Greenwashing isn’t just an isolated issue within corporations; it’s a systemic problem that calls for joint efforts. By leveraging technological innovations, applying strict verification processes, and ensuring complete transparency, we can reshape environmental reporting into a truly effective tool for sustainable development. The future of corporate environmental accountability requires nothing less than a thorough and verifiable commitment. As technology advances and stakeholder expectations grow, corporations need to realize that genuine sustainability involves substantive and measurable actions. Looking ahead, integrating blockchain with artificial intelligence and advanced analytics offers a promising extension of this framework.
ENDNOTES
[1] https://www.reuters.com/business/autos-transportation/committee-probing-toyota-unit-hino-blames-company-culture-false-data-scandal-2022-08-02/.
[2] https://www.sec.gov/news/press-release/2022-171
[3] https://www.sec.gov/news/press-release/2022-72
Yu Gu is an associate professor at Southwestern University of Finance and Economics, Lanxin Jiang is an assistant professor at Stonybrook University, and Jun Dai is an assistant professor at Michigan Technological University. This post is based on their recent article, “Using Blockchain and Smart Contracts to Combat Greenwashing in Environmental Disclosures,” available here.