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What’s the Legal Definition of Greenwashing?

Nobody knows for sure, and that’s causing some big regulatory problems.

Climate Change For Copenhagen Summit

Photographer: Wolfgang von Brauchitsch/Bloomberg

Greenwashing may be the biggest risk to the future of ESG investing, but there’s no firm agreement on what it means in a legal or regulatory context.

The term has become ubiquitous with the rise of ESG. It’s typically used when companies, people or governments overstate, misrepresent or just plain lie about their climate credentials.

For example, a company says it’s reducing its carbon footprint—but fails to say that the calculation excludes massive emissions produced by its customers or suppliers. Or an asset manager overhypes the environmental, social and governance standards it uses to allocate clients’ money. But know-it-when-you-see-it doesn’t translate well into statutory authority.

“The battle to stamp out greenwashing continues to be foiled by the lack of a clear and common definition across jurisdictions,” said Maia Godemer, a London-based sustainable finance analyst at BloombergNEF. “The market can only continue to flourish if regulators build a common framework around what is considered environmentally or socially sustainable.”