With increasing global warming, companies’ pressure to adapt to new social norms enhances. Most countries signed the Paris Agreement, back in 2015, which includes National Determined Contributions (NDCs), which outline the countries climate actions, mitigation targets and adaptation measures. To fulfill those targets, the industrial sector has a crucial role to play within each country. Therefore, public, governmental, and legal demand plays a key role for companies to comply with the set targets. This has pushed companies to adapt and apply sustainable practices within their firm. While some companies have been first mover within adoption of sustainable and ethical business practices following the Environmental, Social, and Governance (ESG) guidelines, others are trying to take the shortcut and avoid any measurements towards these needs.
This is where our research comes into play. Sustainability is a rising star in terms of customer needs, and business reputation. As a company, being associated with sustainable practices increases the company’s competitive advantage and therefore attracts an increasing number of customers, especially the younger generation. In industries as far from energy and food to manufacturing and banking, the demand for green practices has increased tremendously. This incentivizes companies to build a “green” reputation around their business, which often comes with lies, false statements, and unachievable goal settings. To understand the extend of actual implementation of green practices versus false environmental claims our research is exploring the following question: “To what extent are companies actually implementing sustainable practices, and to what extent do sustainability reports reflect genuine efforts, as opposed to being mere instances of greenwashing?” In more detail, we will be training a model which differentiates environmental claims from other business statements of companies, and then comparing the number of claims to carbon emissions of this company. How do they develop within each company? How do they compare between companies? These questions will be answered within our research. Since we are focusing on sustainable practices, it goes hand in hand with looking at the 2030 Agenda for Sustainable Development, containing 17 Goals (SDGs), developed by the United Nations an adopted by all United Nations Member States in 2015. The goals provide a shared blueprint for peace and prosperity for people and the planet, now and into the future. This research will focus on the global banking industry and therefore touches three main SDGs:
- Goal 9: Industry, Innovation, and Infrastructure (Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation)
- Goal 12: Responsible consumption and production: This goal indicates the need to ensure sustainable consumption and production patterns. The banking and finance industry influences consumption and production patterns through responsible lending and investment practices that promote sustainability, circular economy principles, and environmentally friendly initiatives.
- Goal 13: Climate Action: Banks and financial institutions have a critical role in funding climate-related projects. They support renewable energy investments and integrate climate risk management into their operations in order to take urgent action to combat climate change and its impacts.
- Goal 17: Partnership for the goals: The banking and finance sector can foster partnerships and collaborations with various stakeholders, including governments, communities, NGOs, and many more. It has the power to address sustainable development challenges collectively and strive for global partnership for sustainable development.
Before diving right into our research, we looked at the current research environment that focuses on environmental claims, possible greenwashing attempts through companies and methods to uncover those. One key research paper within this field is “An Integrated framework to Assess Greenwashing.” With 12 citations, and a publishing date of 2022, it is the most updated and thorough framework to analyze the quality and truthfulness of environmental claims, up to date. The methodology that it uses and are qualitative analyses of the academic literature to explore varieties of greenwashing, as well finding typologies of greenwashing, and detecting and analyzing greenwashing claims. Additionally, the paper looked at non-academic and practitioner sources an analyzed their greenwashing clauses. This included monitoring organizations and analyzing them based on Greenpeace given greenwashing detection criteria. Based on that, dirty companies, ad buster, political spin, and non-law compliant environmental claims are categorized as greenwashing related company statements. The paper concludes that the term “greenwashing” is far from clearly defined as the research in this field in conceptualized by several influencers including the field of business, media, communication, environmental studies, law, social sciences, and many others. The main results of the paper boil down to the definition of greenwashing which is as follows. “Greenwashing is an umbrella term for a variety of misleading communications and practices that intentionally or not, induce false positive perceptions of an organization’s environmental performance. It can be conducted by companies, governments, politicians, research organizations, international organizations, banks, and NGOs too and it can range from slight exaggeration to full fabrication, thus there are different shades of greenwashing.” To analyze environmental claims, the paper concludes that the definition requires continuous assessment. Moreover, is offers an integrated framework that helps to find a claim that is potentially a greenwash and check it against the list of indicator questions in the framework. The paper concludes that this framework should help to avoid greenwash practices by the mentioned organizations.
Another recent development and research within this field has come from a collaborative research team based at University College Dublin. A team of impact-driven sustainable finance experts from academia and industry have been developing GreenWatch, a tool for the financial sector to assess and monitor the authenticity of green claims. GreenWatch came to live 2022 and was a seed-phase team in Science Foundation Ireland’s AI for Societal Good Challenge and co-founded by the Department of Foreign Affairs and Trade. GreenWatch was created with the mission to empower investors with data to assess the credibility of green claims made by companies to accelerate the transition to a climate-neutral economy. To do so it determines greenwashing statements of the corporate sector through 3 steps. First, it uses a trained algorithm to detect “green statements”. These statements are rated and ranked based on their audacity. The next step is the verification process by a sustainable finance professional within the team to confirm or reject the ratings given by the AI model. Finally, the rating of the claim is compared to greenhouse gas performance of companies, which are publicly reported by each firm. Important to know about the model that decides over the categorization of green claims, is the way that it has been set up. Looking at it from a decision tree perspective, the first node of the tool decides the firm’s stance on climate change. Following this, the next decision node is based on the sufficient GHG emission performance of the company, with a benchmark being at 7% of GHG reduction year on year until. The tool is currently employed in the market, used by various investors to follow their impact investment strategies, and achieve their goals. According to Georgiana Ifrim, computer science professor at the University College Dublin says that GreenWatch showed that a large number of companies make absolute claims that just do not stand up when contrasted with the United Nations Environment Programs that set the benchmark of 7.6% emission reduction every year until 2050. GreenWatch focuses just as our research on the financial sector working towards the realization of four SDGs, including affordable and clean energy, decent work and economy growth, industry and innovation, and just as our focus, on positive climate actions as a whole.
Lastly, we take a look at the research that gives the foundation to our research methods. In 2022, the ETH Zürich’s center for Law & Economics department, in 2022 published the paper “A Dataset for Detecting Real-World Environmental Claims”, including a dataset of annotated environmental claims. These claims were made by listed companies, mostly in the financial domain, which implies the research is focusing on the financial sector. A claim was labelled to be an environmental claim when it “referred to the practice of suggesting or otherwise creating the impression (in the context of a commercial communication, marketing or advertising) that a product or a service is environmentally friendly (i.e., it has a positive impact on the environment) or is less damaging to the environment than competing goods or services.” In addition to providing the annotated dataset, a case study on corporate earning calls was made. In order detect greenwashing practices, the first few models were trained on the test set including a total of 2400 samples. Training the model and testing it on a sample size of 300 claims the model RoBERTa(large) with a F1 score of 90.7, slightly outperforms ClimateBert (86.7), RoBERTa(base)(85.7), as well as DistilBERT (84.7). After training the model on the annotated dataset, it was applied in a field study where 12 million sentences from corporate earning calls of 3361 unique companies between 2012 and 2020 were analyzed and categorized in environmental / non-environmental claims. Using the ClimateBert model, the development showed the exponential increase in claims since the Paris Agreement in 2015.
Overall, the literature review has shown that many academic papers tackle the issue of greenwashing. To understand the dimension of false claims, these papers mainly focus on the term definition of greenwashing. As there is no clear statement of what practices and wording includes, this term must be consistently adapted due to changing social and technical norms. On the other hand, industry example has shown that there is an increasing demand in order detect and use those claims for the greater good of society when banking decisions investments are made.