Consumers’ growing interest in environmental sustainability has prompted companies to launching major ad campaigns touting their green credential, often with misleading claims. Enterprise Carbon Accounting (ECA) software can have the infrastructure necessary to hold greenwashers accountable.
by Hunter Richards, Accounting Market Analyst for Software Advice
Greenwash (verb, \ˈgrēn-wȯsh\) – to market a product or service by promoting a deceptive or misleading perception of environmental responsibility.
It’s no secret that “going green” has become the next big thing in the corporate world. Riding the wave of consumers’ growing interest in environmental sustainability, companies are launching major ad campaigns to tout their green credentials. But many of their claims are misleading or downright false. The ads are compelling, but how are we to know who’s telling the truth? “Greenwashing” is eroding the credibility of well-intentioned green businesses and turning would-be green consumers into skeptics.
It’s reminiscent of the challenge to hold corporations accountable for their financial reporting. While the recent financial crisis highlighted the shortcomings of our markets and reporting structures, the United States business community is still a leader in financial accounting, reporting and ethics. Our system is sophisticated, consisting of a combination of generally accepted accounting principles (GAAP), fairly rigorous government oversight, a massive industry of accounting professionals and mature accounting software technologies that keep track of every last dollar.
We must develop the same infrastructure for environmental accounting. The development of Enterprise Carbon Accounting (ECA) software is well underway, with roughly 60 vendors bringing solutions to market. ECA software enables companies to track their carbon footprint and the footprint of their suppliers as well as the impact of customer use of their products. It’s a promising innovation that can help us manage corporate America’s environmental footprint, but it’s still at the early stages of adoption. We need a number of things to happen for the ECA market to mature and develop environmental accounting to the same level as financial accounting.
So what will it take to develop the ECA software market and have the infrastructure necessary to hold greenwashers accountable? We think there are five key requirements to get us there:
- Clear government action on regulations;
- Adoption of carbon accounting principles;
- Expansion of “Scope 3” emissions accounting;
- Better business incentives to go green; and
- Demanding, informed consumers.
Clear Government Action on Regulations
If corporations are to be held accountable for green claims, we need orders from the top. But the U.S. has been relatively slow to pass laws with lasting environmental impacts. The Environmental Protection Agency (EPA) and Congress are at a stalemate in agreeing upon carbon emission regulations. Legislation often gets caught up in political gridlock – such as the American Clean Energy and Security Act, which would introduce an emissions trading plan not unlike Britain’s CRC Energy Efficiency Scheme. The bill passed the House in 2009 but has yet to be addressed by the Senate.
However, steps are being taken in the right direction – like the EPA’s Mandatory Greenhouse Gas Reporting Rule, which requires companies that emit 25,000 metric tons or more of greenhouse gases annually to disclose emissions information to the EPA. There’s also progress at the state level. California’s Global Warming Solutions Act of 2006 aims to reduce the state’s carbon emissions to 1990 levels by 2020. The increasing role of government-imposed transparency requirements over the coming years will be a major obstacle to greenwashing.
Adoption of Carbon Accounting Principles
We have GAAP and the International Financial Reporting Standards (IFRS) as standards for financial reporting; we need similar principles for environmental accounting. These principles make sure that each corporation is reporting apples-to-apples numbers. The current most widely used set of international carbon accounting standards, the Greenhouse Gas (GHG) Protocol, is still maturing. When a business is required to disclose its carbon footprint according to broadly accepted standards, regulators, investors and consumers will all be able to see who’s truly green and who’s just greenwashing. Companies like Dell, Apple, IBM, and Wal-Mart have already begun to adopt nascent carbon accounting principles.
As ECA and similar innovations arise, carbon accounting will become more widespread and lessen the potential for greenwashing. As more companies face requirements to track and disclose emissions, others will voluntarily do so as the process becomes more standardized and manageable. Once carbon accounting has been adopted by most businesses, disclosure of the company’s carbon footprint will be a prerequisite for businesses to make any sort of claims of environmental friendliness.
Expansion of “Scope 3” Emissions Accounting
Scope 3 emissions are indirect emissions resulting from a company’s actions, the sources of which are not owned by the company. An example is the carbon emitted by a company’s suppliers. Requiring Scope 3 in every carbon accounting report would prevent companies from cutting corners to artificially report a smaller carbon footprint. Take Dell’s report of its carbon “neutrality” for example.
In 2008 Dell claimed to have become “carbon neutral,” but estimates had neglected to account for Scope 3 emissions. Intentional or not, Dell was grossly under-reporting its carbon footprint and claiming false credit for distorted reports – a form of greenwashing. With a rigid set of carbon accounting standards, including Scope 3 disclosure, this never would have occurred. In the GHG Protocol, tracking Scope 3 emissions is currently optional. As more companies voluntarily track Scope 3, though, it’s only a matter of time before it’s required and fully incorporated into ECA software – making it nearly impossible to “pull a Dell.”
Scope 3 disclosure requirements will also force wider adoption of comprehensive carbon accounting among related businesses. A viral effect will spread adoption, killing the potential for greenwashing throughout the supply chain. To disclose its Scope 3 emissions, a company often must ask suppliers to track their emissions. With Scope 3 requirements, these suppliers will have to request the same of their own suppliers – and so on. With carbon accounting requirements and a standardized Scope 3-inclusive reporting scheme, the number of businesses with full emissions records will explode – dealing a critical blow to greenwashing potential in the process.
Better Business Incentives to Go Green
Sustainable business practices are more often than not motivated by revenue generation or inherent cost savings. As these incentives increase, truly beneficial green actions will take hold and the need for greenwashing will fade. For example, nearly one-third of small businesses face energy costs as their largest expense. They have an economic incentive to trim these costs, reducing their waste and carbon footprint. When it becomes easier to identify cost-saving opportunities, as with the use of a mature ECA software system, carbon footprints will shrink naturally.
Government incentives are also cost-saving opportunities for businesses with environmental responsibility. Tax incentives are awarded for using hybrid or green diesel for transportation, for example. A global survey this year by workspace solutions provider Regus concluded that 63% of U.S. companies need more tax breaks to accelerate green investments. The government will likely expand financial incentives for green businesses as environmental stewardship becomes more of a national priority. Similar to compliance capabilities in other software systems, ECA software could develop to alert users to new opportunities to take advantage of government incentives. When a cap-and-trade scheme or similar system is finally implemented, the economic incentives will skyrocket, further spreading carbon accounting practices and edging out potential greenwashers.
Demanding, Informed Consumers
As green buyers become more savvy, greenwashers will no longer be able to conceal fraudulent claims. This year’s third annual environmental consumer behavior survey by the National Geographic Society and GlobeScan polled consumers in seventeen countries, determining that they perceived greenwashing as the biggest obstacle to environmental improvement. Consumers are demanding product sustainability information before believing the green hype. Wal-Mart plans to use supplier-provided carbon accounting information to start a system of product labels for customer reference. As detailed sustainability information develops into the new norm, claims of green marketing will fizzle without hard evidence. Greenwashers will obtain ECA software to comply and the resulting transparency will effectively destroy false marketing potential.
What are your thoughts? Are we missing a critical new weapon against greenwashing? Let us know in the comments.
This article was originally posted at Software Advice.
