How much of ESG is merely marketing? Avoiding Greenwashing is not as simple as you may think.
The increasing expectations of responsible, equitable and environmental business practice has catalysed the growth in ESG (environmental, social and corporate governance) investment. With allocation of green funds rising six-fold since 2015, according to Bloomberg, investing sustainably has become not only fashionable but the norm.
And this is just the beginning.
Deloitte has showed that in the U.S., investors will have 50% of their total investments in ESG assets by 2025. This highlights a growing consideration for the environment and social welfare.However, it is important understand the root cause behind what motivates a business to integrate ESG into their framework. Especially, with a rise in Greenwashing reports and concern over the impacts of this on the validity of ESG reporting, particularly if a company’s intention is just to improve public relations.
Defined by the Oxford dictionary, Greenwashing is described as the “disinformation disseminated by an organisation so as to present an environmentally responsible public image”. If companies make misleading claims about their ESG investing in order to improve public relations, this may undermine the validity and importance of ESG practices. For example, Amazon retailer has committed to carbon neutrality by 2040, making its stock ESG friendly. Where one of the largest ESG funds under assets, Parnassus, had significant shares in Amazon. However, Amazons carbon dioxide emissions rose by 15% from 2020, registering 51.17 million metric tons of CO2. How can a company with intentions of improving ESG, yet is failing to do so, be branded as a suitable ESG investment?
So how do we qualify an ESG investment?
Clarity on what constitutes a suitable ESG investment is essential, otherwise it becomes increasingly difficult for those ho want to support ESG practices. This will require both an increase in data submitted by companies for ESG assessments and an
improvement in the quality of data provided. This would avoid the risk of companies failing to disclose essential information for ESG reporting. In the past, companies have been able to hide their most damaging practices by outsourcing certain parts of their production. This could enable them to hide carbon emissions or poor governance practices by subcontracting them to other companies or jurisdiction
What happened with Boohoo?
Boohoo received a double A rating by the MSCI, which described the online retailer as “leading its industry” in managing the most significant ESG risks and opportunities. More than 20 funds aiming to invest sustainably had subsequently invested in Boohoo. However, a few weeks after this rating, the leading online fashion retailer had received backlash from the Sunday Times concerning poor working conditions in a factory in Leicester. Alarmingly, claims of only paying
workers £3.50 per hour were also included. This raises questions about how Boohoo managed to obtain such high ESG ratings whilst acting against the very nature of what ESG stands for. Boohoo scored poorly on measures of transparency including a lack of traceability within its own supply chain, which is likely why the above issues were missed by ESG reporting agencies. This moves that what is needed is transparency with firms and a clear, methodical approach to understanding what ESG means for each company. A “tick box” approach may fail to recognise the true intricacy behind ESG practice. Instead, with better and transparent reporting, ESG failures such as this
transparent reporting, ESG failures such as this, could have been both uncovered and demonstrated in ESG assessments. It is clear that with investors increasing focus on sustainability, they are able to influence corporate decision making. For example, the chief executive of the mining company, Rio Tinto, was forced out after uproar due to the destruction of a 46,000-year-old Aboriginal heritage site.
Companies can no longer focus solely on maximising profits but are required to hold themselves to a set of environmental and social objectives. KPMG’s UK Chairman Bill Michael also resigned after telling his staff to “stop moaning” due to the current pandemic, highlighting the increasing importance of governance within ESG objectives. The growing significance of ESG in corporate decision making, strengthened by the pressure from investors, will further catalyse ESG disclosures into mainstream thinking. As ESG reporting evolves and improves, performative ESG claims will be increasingly exposed until Greenwashing is so obvious that it fails to even be misleading.