Analyzed in light of a first-of-its-kind economic analysis from the Indiana University Kelley School of Business, BP offers a classic case of the potential downside for companies that place greenwashing ahead of truly transparent disclosure, researchers said.
Greenwash, as defined in the study, is “the selective disclosure of positive information about a company's environmental performance without full disclosure of negative information on these dimensions.”
“Greenwash makes sense from a business perspective as it's logical to emphasize the positive outcomes and stay away from problem areas,” said John Maxwell, professor of business economics and public policy at Kelley and co-author of the analysis.
“However, as BP demonstrates, if the public comes to view a company as ‘green,’ there will be a high price to pay if it discovers it has been duped – especially if the public suffers in a major way from ruined ecologies, job losses and other economic problems,” Maxwell added.
The BP oil spill has given reinforcement to activists who have long pressured firms to more fully disclose their environmental and social performance instead of opting for greenwash. However, Maxwell warns that this might not yield the intended results.
“Our study shows that increasing the pressure on companies to be more transparent often causes management to clam up rather than voluntarily disclose more,” he said.
Environmental Management Systems
The analysis indicates that companies with projects that have a high probability of being socially responsible are less likely to be forthcoming about them if they do not have a clear grasp of the potential impact of their activities. On the other hand, companies that have a handle on the impact of their environmental and social performance are more prone to be transparent.
To help activists and management deal with these important findings, the authors suggest a more strategic approach. Instead of simply demanding greater disclosure, activists should encourage companies to adopt environmental management systems (EMSs): sets of management tools and principles designed to create the administrative procedures that an organization needs to integrate environmental concerns into its daily business practices.
According to the study, these tools will help ensure that managers are aware of environmental and social impacts, which will make their companies more prone to disclose more about their green and not-so-green actions.
“Widespread adoption of EMSs would heighten overall transparency, making it much more likely that managers would support increased disclosure,” said Maxwell. “No longer would they be constrained by a lack of knowledge that breeds fear and uncertainty. In general, EMSs would help facilitate a fairer, which means more efficient, marketplace while taking positive steps toward ensuring greater environmental and social protection.”
Maxwell coauthored the analysis, “Greenwash: Corporate Environmental Disclosure under Threat of Audit” with Thomas P. Lyon at the University of Michigan. The work is forthcoming in the Journal of Economics and Management Strategy.