Organisations and directors face significant reputational and liability risks if they engage in greenwashing. Sharan Gill, Associate Editor, CGj, answers key questions about the nature, and best practice management, of these risks.

Greenwashing allegations have been much in the news recently. On 15 February this year, climate activists voiced concerns about Lufthansa’s introduction of ‘Green Fare’ flights – in particular questioning the suggestion that these flights’ CO2 emissions were being compensated for. In October last year, HSBC suffered a blow to its green credentials when the UK advertising watchdog banned a series of misleading adverts and said any future campaigns must disclose the bank’s contribution to the climate crisis. 

The reputational fallout arising out of these incidents is a stark reminder to organisations of the risks associated with greenwashing. ‘If a company or institution is going to make statements that project ESG commitments, it is going to have to make sure those statements are truthful, accurate and clear, and the claims that it makes are going to have to be substantiated,’ says Ben McQuhae, Founder, Ben McQuhae & Co.

What is greenwashing?

There can be no doubt that greenwashing is a key concern for governance professionals, but it is not easy to pin down an exact definition, partly due to varying terminology around this space. A paper published in January this year by a consortium of ESG experts led by Dr Daniel Cash of Hong Kong law firm Ben McQuhae & Co – Joint Response to ESAs Call for Evidence on Better Understanding Greenwashing (Greenwashing Paper)  explains that the term has traditionally been defined as the intersection of two firm behaviours, namely, poor environmental performance and positive communication about environmental performance. In particular, organisations making commitments in the public domain – for example net zero within a specified time frame – need to ensure that these commitments are backed up by management processes, key performance indicators (KPIs), strategies and specific plans. 

The Greenwashing Paper highlights key practices that can amount to greenwashing.

  • Selective disclosure – where firms focus on beneficial or relatively benign performance indicators to obscure their less impressive overall performance.
  • Decoupling – where symbolic actions are taken, or statements made, aimed at satisfying stakeholder expectations in terms of sustainability and to deflect attention from the real issue – the need to take concrete action.
  • Executional greenwashing – much more subtle in nature, this is where no explicit claims are made, but the overall impression given is that of sustainability, or of a commitment to improving the environment, in the absence of actual measures taken to back this up.

In essence, says Pat Nie Woo, Partner and Head of ESG in Hong Kong at KPMG China, ‘there is often a disconnect between the external facade and the internal reality’.

Why is greenwashing a governance issue?

One of the reasons greenwashing has become prominent so quickly, says McQuhae (also one of the authors of the Greenwashing Paper), is that ‘it is an essential tool to accelerate capital to sustainable projects’. Investors need to be able to rely on the ESG information, including the mission statements, provided by companies, but some companies may be tempted by the prospect of attracting investor capital by inflating their sustainability credentials. 

Mr McQuhae points out that, as we look to integrate anti-greenwashing mechanisms into financial systems, we have to be mindful that it is a process, and should be working to educate the regulators, as much as listed companies, on why it is important to get this right. ‘Sustainability is not something you do on the side,’ says Mr Woo. The question to address, he emphasises, is whether a company’s sustainability processes are robust. 

While companies can be exhorted to make changes from within, it is also important for regulators to ensure enforcement of the rules. When companies and directors have reason to believe that the regulators are going to scrutinise their disclosures for signs of greenwashing, then the fear of reprisals, and the inevitable reputational fallout involved, will be the most effective method to encourage best practice.

What are the relevant regulatory developments?

In Hong Kong there is no legislation specifically targeting greenwashing, but some aspects of greenwashing could fall within the existing framework. Regulators already have the tools to take action against companies making misleading statements, for example, under existing laws addressing misrepresentation. 

Are misrepresentation provisions an effective tool to tackle greenwashing? Mr McQuhae points out that there has to be a victim and that victim has to be willing to take action, but in most cases a victim of greenwashing is unlikely to initiate court action. He points out that we have yet to create enough definition around these terms to create a level of certainty to be able to address greenwashing in a coherent manner similar to how other forms of misrepresentation are tackled. 

Specific greenwashing regulation would be a more effective deterrent, emphasises Mr Woo, as regulators always kickstart the process of behaviour change. He believes that we need regulation to come in ‘to enforce change, enforce disclosure and enforce accuracy of information’.

The international picture

Globally there has been a concerted drive for clearer and more standardised reporting standards to allow stakeholders to better monitor companies’ green credentials. The International Financial Reporting Standards Foundation, for example, launched the International Sustainability Standards Board (ISSB) in November 2021 to establish a comprehensive global baseline for sustainability disclosures. 

Meanwhile, the International Organization of Securities Commissions (IOSCO) has emphasised a focus on mitigating greenwashing, and recommends greater disclosure requirements. 

Within the UK there have been many developments with significant implications for the fight against greenwashing.

  • The Financial Conduct Authority (FCA) in its last annual letter emphasised that it would exercise more stringent supervision over ESG integration in asset management. It rolled out a consultation in 2022 to introduce regulations to help mitigate greenwashing risks.
  • The Competitions and Markets Authority (CMA) has, via the Green Claims Code, provided guidance on environmental claims in goods and services.
  • The Committee of Advertising Practice has published guidance on making carbon neutral and net-zero claims in UK advertising, non-broadcast and broadcast.

In the US, the Securities and Exchange Commission has proposed to amend the rules to enhance scrutiny of ESG funds. This will dictate that a fund’s investment portfolio must constitute at least 80% of its stated target. 

In the EU, the Green Deal approach has taken several forms which will impact the development of anti-greenwashing initiatives. The Sustainable Finance Disclosure Regulation, the EU Taxonomy (which provides a minimum standard across sustainability disclosure requirements) and the recently implemented Corporate Sustainability Reporting Directive present a unified approach to disclosure, identification and substantiation.

Hong Kong’s regulatory trajectory

Mr McQuhae points out that, historically, Hong Kong regulation has been significantly guided by developments in other key markets. Shareholders demand what constitutes best practice internationally and, presently, much of the best practice with regards to greenwashing accords with standards being set in the UK. 

Regulators in Hong Kong have, however, been rapidly evolving local regulatory requirements to combat greenwashing.

  • Hong Kong Exchanges and Clearing Ltd (HKEX) proposes to upgrade Appendix 27 of the Main Board Listing Rules to align with the standards expected to be released this month by the ISSB.
  • The Securities and Futures Commission (SFC) has highlighted greenwashing as a key threat to the development of green and sustainable finance and is focused on mitigating this risk. In its agenda for green and sustainable finance – Strategic Framework for Green Finance – the need to tackle greenwashing is stated as a key challenge for the SFC. It remains to be seen whether the SFC’s approach will include new greenwashing-specific regulation, an ESG-enforcement taskforce, direct enforcement action, or a combination of these.
  • The Hong Kong Monetary Authority has also been addressing greenwashing issues. In a research paper published in November 2022 – Greenwashing in the Corporate Green Bond Markets – it estimated that up to 30% of green bond issuers are engaged in greenwashing.

What does this mean for directors?

Under Appendix 27 of the Main Board Listing Rules, the board has overall responsibility for an issuer’s ESG strategy and reporting – this of course includes greenwashing. Mr McQuhae points out that ‘regardless of whether there are any regulations in Hong Kong specifically or otherwise targeting greenwashing, directors are already exposed if they overlook a greenwashing event that presents a material risk to the financial performance of the company’. 

Mr Woo highlights key questions the board should be addressing.

  • Is there sufficient expertise when looking at these issues?
  • Is there someone responsible for this?
  • Is the board setting up a sustainability committee to look at this more closely?
  • Is there sufficient incentive for non-executives to review the processes involved?

Mr McQuhae emphasises that whether you are an independent non-executive director (INED), or an executive director, you cannot claim ignorance of these issues – ignorance is not a defence to the discharge of a director’s duties. This is particularly true for directors who take on a role with specific responsibility for the management of ESG issues and they need to be careful to ensure that they are properly informed in order to be able to make key decisions. If such directors cannot identify a greenwashing issue, they will suffer reputational damage along with the company. 

At heart, this is a transparency issue. ‘Greenwashing is a shorthand that we use to advocate for transparency, and proper and accurate communication’ Mr McQuhae says. He points out that increasing transparency requirements in the current market are going to inform best practice going forward. The focus will be on ensuring that listed companies have an obligation to make sure that the statements they put out in the public domain relating to the environment are truthful, accurate, and, crucially, that the claims they make are substantiated. 

This needs to be very much on the risk register of INEDs and embedded in the enterprise management framework. INEDs should be asking: should internal audit be involved? Should internal audit be looking at the robustness of the ESG reporting process? 

It is also important to look beyond the jurisdiction that a company may be listed in and assess greenwashing risks across all jurisdictions that are relevant to shareholders. In particular, greenwashing allegations may result when companies are not coherent with their disclosures across the different jurisdictions they operate in.

What are the implications for sustainability reports? 


The ESG space is changing rapidly with new regulations and requirements coming out every year. The regulatory developments mentioned above will likely mean that organisations will soon have to start disclosing the impact of climate on their enterprise value, and there will be a need for increasing quantitative disclosures over time. The accuracy of the numbers being disclosed will come under scrutiny exposing companies to greenwashing risks. 

It will be very difficult for any organisation to keep abreast of all of these changes as soon as they come out without external assistance, but Mr Woo believes that, ideally, an organisation should gradually develop its capabilities in the preparation of sustainability reports. Though initially externally outsourced, over time internal management should be able to take on more of a role.


Mr McQuhae stresses that listed companies need to ensure that both the qualitative aspects of their ESG reports and the data are independently assessed to ensure that disclosures are in compliance with all applicable regulations in Hong Kong and any other jurisdictions that key shareholders are subject to.  

Preparation and assurance have to be looked at differently, points out Mr Woo. The consultants preparing the report should not be assuring it and vice versa. However, at present the assurance landscape globally is not sufficiently regulated. Currently there are different types of assurance, with different types of companies using different methodologies to assure ESG reports. Some are assured by well-known global accounting firms, but there are other organisations that are not under a regulatory regime. This results in differing types and quality and robustness of assurance. The assurance of ESG reports, he emphasises, needs to be aligned globally.

What is the role of environmental activist groups and the media?

One effective deterrent to greenwashing is the role of activists, NGOs and the media. The greenwashing paper mentioned above points out that, as consumers, the public and investors become more interested in environmental issues, environmental activist groups become more powerful and can exert influence and pressure on companies. The threat of public exposure stemming from the accusation of a third party is an essential element of greenwashing risk that companies need to be wary of. 

McQuhae suggests that we shift focus to the UK, which has the newest and latest anti-greenwashing regulation. He points out that it is no coincidence that much of the high-profile naming and shaming has happened in the UK. This has not been necessarily through the regulator but primarily through the advertising standards agency. ‘It is this public profile of naming and shaming through enforcement action that has probably done more to alert the business communities than any regulation that already exists or is in the pipeline,’ he says.

What is the role of governance professionals?

Governance professionals need to be kept up to speed via CPD to ensure that they are aligned with the market and new developments. ‘There is a need for both financial and ESG reporting to hold the same sway’, says Mr Woo. ‘It will take some time but it needs to happen, when real dollars are changing hands based on the information you put out in the public domain, accuracy becomes vital’. 

He adds that financial information that a company puts out in the public domain needs to be future proof. What is acceptable now may not be acceptable in the future. Companies need to be aware of this – sustainability claims made today need to be credible and to hold up to scrutiny in the years to come. 

Sharan Gill  
Associate Editor, CGj   

SIDEBAR: How important are ESG ratings?

Related concerns pertain to how the ratings market has evolved, and the perceived lack of clarity and certainty over the methodologies being applied. Even those companies that have shown goodwill in reporting GHG emissions may cherry-pick their data and methodologies. The question thus arises whether there should be a level playing field, and all companies should be measured equally. However, as ESG ratings help shareholders verify the sustainability performance of a company, it is important for management to identify which methodology is relevant to the company’s operations, not just which should enable it to score better. The cookie-cutter approaches of third-party ratings may not necessarily be effective to compare and contrast the relevant sustainability performance of different companies.