How Sustainability Assurance Reduces Greenwashing Risk

Greenwashing — the practice of making misleading or unsubstantiated environmental and sustainability claims — has moved from a reputational nuisance to a legal and financial liability. Regulatory enforcement actions are multiplying, investor scepticism is rising, and litigation is increasing. In this environment, independent sustainability assurance is the most effective mechanism organisations have for ensuring their ESG claims are credible, defensible, and compliant.

This article examines the greenwashing landscape, how assurance specifically addresses the problem, and what organisations should do to strengthen the credibility of their sustainability disclosures.

The Greenwashing Problem: Scale and Consequences

Greenwashing is not a marginal issue. Studies by the European Commission found that over 53% of environmental claims in the EU were vague, misleading, or unfounded. The Changing Markets Foundation found that 60% of sustainability claims by major fashion brands did not meet basic substantiation standards. RepRisk, a global ESG data provider, tracked a 70% increase in greenwashing incidents between 2020 and 2024.

Why Greenwashing Is Systemic

Greenwashing persists because of structural factors in sustainability reporting:

• Voluntary and inconsistent standards: Until recently, sustainability reporting was voluntary, and standards varied widely — creating opportunities for selective and favourable disclosure
• Complexity of ESG data: Sustainability metrics involve estimates, assumptions, and methodological choices that can legitimately produce different results — making it easy to choose favourable approaches
• Misaligned incentives: Marketing and communications teams may prioritise positive narratives over accuracy, particularly when sustainability reporting sits outside the finance function
• Lack of verification: Until mandatory assurance requirements, most sustainability claims were self-reported and unverified — the equivalent of financial statements without an audit
• Vague terminology: Terms like "sustainable," "green," "eco-friendly," "carbon neutral," and "net zero" lack standardised definitions, enabling broad and unsubstantiated claims

The Consequences of Greenwashing

The consequences are no longer limited to bad press:

• Regulatory fines: Multi-million dollar penalties from consumer protection and securities regulators
• Litigation: Climate litigation cases exceeded 2,500 globally by 2024, with a growing share targeting corporate sustainability claims
• Investor action: Shareholder resolutions, divestment, and activist campaigns targeting greenwashing
• Market exclusion: Companies flagged for greenwashing face exclusion from ESG indices and sustainable investment funds
• Brand destruction: Consumer trust, once lost, is extremely difficult to rebuild

High-Profile Greenwashing Cases

Recent enforcement actions illustrate the breadth and severity of greenwashing consequences:

Financial Services

• DWS (Deutsche Bank): The SEC settled charges against DWS for $19 million for misrepresenting ESG integration in its investment processes. The firm's CEO resigned. A concurrent BaFin investigation in Germany added further regulatory pressure.
• Goldman Sachs: Fined $4 million by the SEC for ESG fund compliance failures related to inadequate policies and procedures for ESG research integration.
• BNY Mellon: Settled with the SEC for $1.5 million over misstatements about ESG quality review for certain funds.

Consumer and Industrial

• TotalEnergies (France): Sanctioned for advertising campaigns implying products were "carbon neutral" without adequate substantiation.
• Keurig (Canada): Fined CAD 3 million for misleading recycling claims on K-Cup pods.
• Clorox/Glad (US): Faced enforcement action over "carbon neutral" claims on garbage bags — claims that relied on offsets without adequate disclosure.

Aviation and Transport

• KLM (Netherlands): Investigated for "Fly Responsibly" campaigns that the court found gave a misleading impression of the environmental impact of flying.
• Lufthansa: Challenged on "green fare" marketing that implied environmental benefits not supported by evidence.

In nearly all these cases, the companies lacked independent assurance over the claims being challenged. Assurance would not have prevented all accusations, but it would have identified unsupported claims before publication.

The Regulatory Crackdown on Greenwashing

Regulators across the globe have moved from warnings to enforcement. Understanding this landscape is essential for risk assessment.

EU Green Claims Directive

The EU's Green Claims Directive is the most comprehensive anti-greenwashing regulation globally. It requires:

• Environmental claims to be substantiated using recognised scientific methods and life-cycle approaches
• Claims to be independently verified by an accredited verifier before they are communicated to consumers
• Prohibition of generic claims like "green," "eco," "sustainable" without specific substantiation
• Carbon offset-based claims (e.g., "carbon neutral product") to clearly disclose the role of offsets vs actual emissions reductions
• Penalties of up to 4% of annual turnover in the relevant Member State

ACCC (Australia)

The Australian Competition and Consumer Commission has made greenwashing a strategic enforcement priority. It has pursued multiple cases involving energy companies, consumer goods brands, and financial services firms, with penalties reaching millions of dollars.

CMA (UK)

The Competition and Markets Authority published its Green Claims Code and has investigated claims across fashion, household goods, and energy sectors. Companies have been required to change marketing practices and, in some cases, withdraw products.

SEC (US)

The SEC's Climate and ESG Task Force has brought multiple enforcement actions against investment firms for ESG misrepresentation. The focus has been on investment products marketed as ESG or sustainable without adequate substantiation of the ESG integration claims.

How Assurance Addresses Greenwashing

Independent sustainability assurance directly addresses the root causes of greenwashing through several mechanisms:

1. Evidence-Based Verification

The assurance provider tests reported data against source documentation. Claims about emissions reductions, water savings, waste diversion, or renewable energy usage are verified against utility bills, operational records, and third-party data. Claims without evidence are identified and flagged.

2. Independent Scrutiny of Methodology

The assurance provider evaluates whether calculation methodologies are appropriate, consistently applied, and in accordance with recognised standards. This prevents the use of favourable but inappropriate methods (e.g., using market-based Scope 2 accounting to present lower emissions without disclosing location-based figures).

3. Completeness Assessment

The provider evaluates whether the report covers all material impacts — not just the favourable ones. If an organisation's largest environmental impact is omitted from the report, the assurance provider identifies this gap.

4. Scope and Boundary Verification

The provider examines reporting boundaries to ensure the organisation is not selectively excluding high-impact operations. If a company's manufacturing plant with the highest emissions is excluded from the reporting scope, this is flagged.

5. Consistency Check

The provider checks that claims made in the narrative sections of the report are consistent with the quantitative data. If the text claims "30% reduction in emissions" but the data shows only a 12% reduction from a cherry-picked baseline, this inconsistency is identified.

6. Forward-Looking Statement Review

While assurance providers cannot verify future outcomes, they evaluate whether forward-looking statements (targets, transition plans) are based on reasonable assumptions and consistent with historical data and current actions.

Net-Zero and Carbon Neutrality Claim Credibility

Net-zero and carbon neutrality claims are the highest-risk area for greenwashing allegations. They are also among the most valuable claims for marketing and investor relations.

The Problem with Unassured Net-Zero Claims

• Targets may be set against cherry-picked baselines
• Scope 3 emissions — typically 80-95% of total emissions — may be excluded or estimated with unreliable methods
• Reliance on carbon offsets may not be disclosed, or offset quality may be questionable
• Interim reduction targets may be absent, with only a distant 2050 net-zero commitment
• Transition plans may lack specific actions, investments, and milestones

What Assurance Can Verify

• Baseline emissions accuracy: The starting point against which reductions are measured
• Scope completeness: Whether all material emission categories are included
• Calculation methodology: Whether emission factors and calculation approaches are appropriate
• Progress tracking: Whether reported reductions are real and supported by operational changes
• Offset quality: Whether carbon credits meet quality standards (Gold Standard, VCS) and have been properly retired
• Disclosure completeness: Whether the basis for the net-zero or carbon neutral claim is transparently disclosed

For organisations making net-zero commitments, assurance is not just good practice — it is essential risk management. For guidance on the broader case for assurance, see our article on why independent sustainability assurance matters.

ESG Rating Accuracy and Assurance

ESG ratings — from providers like MSCI, Sustainalytics, ISS, and CDP — increasingly influence investment decisions, index inclusion, and borrowing costs. These ratings are only as reliable as the underlying data.

The Data Quality Problem

ESG rating agencies rely heavily on self-reported data. When that data is unassured, rating accuracy is compromised. Studies have shown significant divergence between ESG ratings from different providers for the same company — partly because they receive different data, and partly because self-reported data varies in quality and completeness.

How Assurance Improves Ratings

Independently assured sustainability data improves ESG ratings through:

• Higher data quality scores: Rating agencies explicitly reward organisations whose data has been independently verified
• Greater consistency: Assured data is more consistent across reporting periods and between metrics, reducing rating volatility
• Reduced information risk: Rating models that incorporate data reliability see lower risk scores for companies with assurance
• CDP scoring: CDP explicitly awards higher scores to companies with third-party verification of environmental data

Role of Scope Definition in Preventing Selective Reporting

Scope definition — determining what is and is not included in the assurance engagement — is one of the most powerful mechanisms for preventing greenwashing.

How Selective Reporting Works

Without rigorous scope definition, organisations can engage in "assurance shopping" — getting assurance on favourable metrics while leaving problematic areas unassured. Common tactics include:

• Assuring only Scope 1 and 2 emissions while Scope 3 (typically the majority) is excluded
• Covering only environmental data while excluding social metrics (labour practices, human rights)
• Including only headquarters and main offices while excluding factories, warehouses, and supply chain
• Assuring only aggregate group data while site-level data (where problems may exist) is excluded

How Good Scope Definition Prevents This

A rigorous assurance provider will:

• Align the assurance scope with the reporting scope — if it is in the report, it should be in the assurance scope
• Challenge exclusions — if material topics or high-impact operations are excluded, the assurance statement should note this
• Consider the materiality assessment — the scope should cover all topics identified as material
• Apply professional scepticism — the provider should question whether the proposed scope gives a fair and complete picture

Regulatory Enforcement Trends: What to Expect

The enforcement landscape will continue to intensify. Key trends include:

Cross-Border Coordination

Regulators are increasingly coordinating across jurisdictions. The International Consumer Protection and Enforcement Network (ICPEN) has made greenwashing a global priority, with coordinated enforcement sweeps across member countries.

Data-Driven Enforcement

Regulators are using AI and data analytics to identify greenwashing at scale — screening advertising, product claims, and sustainability reports for unsupported statements. This means enforcement is moving from complaint-driven to proactive.

Private Litigation

Class action litigation targeting greenwashing is growing, particularly in the US, Australia, and the UK. Investors, consumers, and NGOs are bringing claims based on misleading sustainability representations.

Mandatory Assurance as Baseline

As CSRD, SEC, and ISSB-aligned rules make assurance mandatory, companies that only meet minimum requirements may face scrutiny over the areas they chose not to assure voluntarily.

Practical Steps to Strengthen ESG Credibility Through Assurance

For organisations seeking to reduce greenwashing risk and strengthen the credibility of their sustainability claims, the following steps are recommended:

1. Subject your sustainability report to independent assurance: If you are not already doing so, engage a qualified, independent provider to assure your sustainability report. Even voluntary assurance sends a powerful signal. See our guide on choosing a sustainability assurance provider.
2. Ensure appropriate scope: The assurance scope should cover all material topics and all entities included in the reporting boundary. Avoid selective assurance that covers only favourable metrics.
3. Prioritise high-risk claims: Net-zero commitments, carbon neutrality claims, and emission reduction targets should be priorities for assurance, given the enforcement focus on these areas.
4. Align marketing claims with assured data: Ensure that sustainability claims in marketing, advertising, and investor communications are consistent with the assured data in your sustainability report.
5. Document everything: Build comprehensive audit trails supporting every quantitative claim. If you cannot document it, do not claim it.
6. Engage your assurance provider early: Do not wait until the report is finalised to engage the assurance provider. Pre-assurance readiness assessments identify unsupported claims before they become published problems.
7. Apply assurance to product-level claims: If you make environmental claims about specific products (e.g., "carbon neutral product"), consider product-level assurance in addition to corporate-level reporting assurance.
8. Monitor the regulatory landscape: Stay current with the EU Green Claims Directive, ACCC guidelines, CMA Green Claims Code, and SEC enforcement actions to understand the evolving standard for claim substantiation.