Sustainability has become a powerful selling point. Companies worldwide are eager to showcase their commitment to environmental, social, and governance (ESG) initiatives, knowing that investors, consumers, and regulators increasingly favour businesses with strong sustainability credentials. Green labels, carbon neutrality pledges, and ESG-driven marketing campaigns have flooded the corporate world, shaping how businesses position themselves in the market.
The green illusion: why businesses fake sustainability
However, behind the eco-friendly slogans and glossy sustainability reports, not all companies practice what they preach. In 2015, Volkswagen proudly marketed its “clean diesel” vehicles as environmentally friendly—only for investigators to uncover software designed to cheat emissions tests. The fallout, known as Dieselgate, led to billions in fines and a massive loss of trust. This is a classic case of greenwashing—when companies exaggerate or fabricate their sustainability efforts to boost their image. Some do it to attract ESG investors, others to stay competitive, and many to meet regulatory expectations without real change.
The problem? Greenwashing is hard to detect. Sustainability reports are often filled with vague promises and complex jargon, making it difficult for investors, regulators, and consumers to separate real commitments from clever marketing. However, new technology is changing that. Artificial Intelligence and Large Language Models have the ability to expose ESG deception at scale—analysing corporate reports, cross-checking claims, and identifying misleading sustainability narratives.
Artificial Intelligence and Large Language Models have the ability to expose ESG deception at scale—analysing corporate reports, cross-checking claims, and identifying misleading sustainability narratives.
Why business leaders should care about greenwashing detection
For business leaders, the ability to assess greenwashing accurately is no longer optional, it’s a strategic necessity. Here’s why:
1. Financial and legal consequences
Regulatory bodies are tightening the noose around misleading sustainability claims. In 2023, Deutsche Bank’s subsidiary DWS was fined $19 million by the U.S. Securities and Exchange Commission (SEC) for misrepresenting its ESG investment practices (SEC press release). Similar regulatory actions are increasing globally, putting businesses at risk of legal and financial penalties if they fail to provide transparent sustainability disclosures.
2. Investor and consumer trust
In addition to negatively affecting regulatory compliance, greenwashing erodes investor confidence. Modern investors rely on ESG ratings to make informed decisions, and any sign of greenwashing can push them away. For instance, in 2022, Bayer had to pay $698 million for polluting Oregon’s environment, despite claiming strong sustainability practices. This kind of contradiction makes investors doubt a company’s ESG commitments.
Consumers are also becoming more skeptical. Studies show that once a company is caught greenwashing, customer loyalty declines significantly. Brands that prioritise transparency in ESG disclosures can differentiate themselves and build long-term trust.
3. Competitive advantage
Companies that adopt AI-powered ESG analysis gain an edge in corporate sustainability. AI tools can identify inconsistencies in sustainability reports, helping businesses proactively address potential greenwashing risks before they escalate. This not only improves corporate reputation but also strengthens stakeholder relationships.
AI as the truth detector: how LLMs expose false ESG claims
For years, companies have shaped their sustainability image through self-reported ESG disclosures, often using carefully worded reports to emphasise achievements while downplaying shortcomings. Investors, regulators, and consumers struggle to tell genuine efforts from greenwashing due to the sheer volume and complexity of these reports. In my thesis, I leveraged AI, specifically Large Language Models (LLMs), to automatically detect greenwashing and hold corporations accountable for misleading claims. This AI-driven approach combined indicator-based assessments and quantitative scoring models to systematically identify and measure deceptive sustainability practices.
1. Detecting greenwashing indicators in corporate reports
The AI model first assessed a company’s ESG disclosures using two primary types of greenwashing indicators:
- Internal Indicators: Companies often use broad, unmeasurable claims in their sustainability reports. The model analyses ESG disclosures to detect internal greenwashing indicators like vague language and lack of measurable targets. The model flags statements that lack quantifiable data. For example, phrases like “We are committed to reducing our carbon footprint” without any specific reduction targets would raise a red flag.
- Discrepancy indicator: The model doesn’t just analyse company reports, it also compares them with third-party sources like regulatory filings, news articles, and NGO reports. This helps identify discrepancies between a company’s self-reported ESG performance and external assessments. For example, AI detected that Volkswagen’s sustainability claims conflicted with the human rights concerns at its Xinjiang plant.
2. Assigning a greenwashing likelihood score
Once the AI system evaluates a company’s ESG disclosures, it assigns a Greenwashing Likelihood Score (GWL Score) based on a structured, weighted scoring model. Each indicator is weighted based on its significance, with the discrepancy indicator carrying the highest weight (40%) since it is the strongest signal of greenwashing. In my study of 38 German DAX companies, AI-generated greenwashing scores showed a strong correlation with independent ESG risk ratings from Sustainalytics, proving the model’s effectiveness.
As AI-powered tools continue to evolve, businesses will no longer be judged by what they claim, but by what they can prove. Investors, regulators, and consumers now have the means to separate genuine sustainability efforts from corporate greenwashing, making transparency the new standard for success.
What business leaders can do next
1. Strengthen ESG reporting with third-party audits
Leaders should ensure that sustainability claims are backed by independent verification. Third-party ESG audits add credibility and reduce the risk of discrepancies between internal reports and external assessments.
2. Prioritise transparency over perfection
Rather than overstating sustainability efforts, companies should focus on clear, measurable ESG goals. Investors and consumers value honesty, even if a company is still in the process of improving its sustainability performance.
3. Monitor competitor and industry ESG trends
Using AI to track industry-wide ESG disclosures helps businesses benchmark their performance and stay ahead of regulatory trends. This proactive approach enables companies to refine their ESG strategies before they become compliance issues.
ESG under pressure: why greenwashing is still a risk
Despite the push for sustainability, some companies are now retreating from their ESG commitments due to political and regulatory shifts. Growing skepticism, anti-ESG movements, and evolving governance priorities have led some firms to scale back their sustainability efforts. In the U.S., for instance, federal ESG-related regulations are facing reversals, and companies are re-evaluating their approach in response to shifting political landscapes and legal uncertainties.
However, this retreat does not shield businesses from greenwashing risks. Regulatory scrutiny, investor expectations, and reputational stakes remain high, especially with the EU’s Corporate Sustainability Reporting Directive (CSRD) and the rise of ESG-related litigation. Companies that weaken their sustainability commitments while continuing to market themselves as ESG leaders could face serious legal and financial consequences. Instead of abandoning ESG, businesses should focus on transparency, materiality, and verifiable sustainability strategies to minimise greenwashing risks and maintain stakeholder trust—even in an uncertain political climate.
The future of ESG: from words to action
The era of performative sustainability is fading. Greenwashing is no longer just an ethical concern—it’s a financial and regulatory risk. As AI-powered tools continue to evolve, businesses will no longer be judged by what they claim, but by what they can prove. Investors, regulators, and consumers now have the means to separate genuine sustainability efforts from corporate greenwashing, making transparency the new standard for success.
For business leaders, the choice is clear: embrace AI-driven ESG accountability or risk losing trust, investment, and market position. Those who integrate rigorous ESG verification, back their claims with data, and prioritise real impact over appearances will thrive in this new era of corporate responsibility.
Sustainability is no longer about who speaks the loudest—it’s about who delivers the truth.
This article is based on the author’s thesis as part of the Master of Science in Big Data Business Analytics at ESCP Business School.
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