Regulation will never be sufficient to protect investors from greenwashing, says Alexandra Mihailescu Cichon, EVP at RepRisk.
In the shadow of the UN General Assembly and the countdown to COP27, one thing is becoming clear: companies worldwide are under increasing pressure to prioritise sustainability and responsible conduct within their business operations – and demonstrate results. Regulators, investors, and the public are just some of the stakeholders laying on the pressure.
While this is to be encouraged as a step toward the transition to a more sustainable future, focused around lower-carbon economies, this same pressure has also led to an uptick in greenwashing.
Greenwashing, put simply, is an exaggerated or inaccurate claim about a company’s sustainability. As businesses scramble to meet expectations, investors are quickly learning that not all that glitters is green. The announcement from the UK’s Competition and Markets Authority (CMA) that they are looking into firms such as ASDA and Boohoo over claims of greenwashing should be a real warning to investors that it can become a material risk.
In fact, in the last two years, approximately one of every five climate-related ESG risk incidents was also linked to misleading communication, i.e. greenwashing.
We’re seeing a trend of incidents increasing. Frequency of greenwashing is escalating in Europe and the Americas, with companies in these regions criticised and recording increasing numbers of greenwashing ESG incidents since 2019.
It’s no longer just industries such as oil and banking that face increasing pressures; the retail and personal and household goods sectors were responsible for 10% of greenwashing incidents in 2021. At the same time, in the food and beverage industry the number of climate-related ESG risk incidents linked to greenwashing increases to one in every three – indicating a sector particularly prone to the issue. You just have to look at recent examples to explore how and why this is happening – with organisations such as Innocent Drinks, and their parent company Coca-Cola, as well as consumer goods power-house, Unilever, all coming under fire.
In part, the recent rise in misleading communication incidents can be linked to two areas: lobbying and offsetting. Focusing on lobbying activities is a powerful way to evaluate whether companies ‘walk their talk’ when it comes to environmental issues, as lobbying frequently goes unnoticed to the public eye and is not disclosed in self reports. In relation to climate change, this could involve a company directly or indirectly influencing climate or emissions policy decisions to their advantage, while publicly marketing themselves as green. The Global Standard on Responsible Climate Lobbying has brought attention to this issue, calling on companies to align their actions and commitments with the Paris Agreement goals, but this opaque practice still creates a challenge for investors.
At the same time, offsetting creates additional complexities when assessing the ESG risks surrounding a company. It is – rightly – seen as a near-term solution but can often have wider ESG implications, such as tree planting initiatives linked to the displacement of communities, and logging of trees only a few years after planting. While these ‘green’ initiatives look great to investors at face value, they often aren’t given the full picture on what is happening behind the scenes.
So how can investors identify greenwashing attempts, and separate shallow promises from tangible and honest action by companies? The problem is amplified further through a recent focus across the world on decarbonisation – a complicated issue, and one particularly prone to weak paper commitments from businesses, with limited actual progress.
Walk the talk
Investors want to know if companies walk their talk when it comes to environmental issues – but also human rights, corruption, and so on. While regulation aims to standardise reporting and level the playing field when it comes to ESG transparency, investors need to be prepared and equipped to look beyond company self-reporting that can be biased and mask risks. To be clear, no matter what the regulations will bring, company disclosures or reporting should definitely not be the sole basis for a sound investment or business decision.
Data plays a key role in this due diligence. Equipped with the right data – impartial and transparent –investors will be able to help drive better business conduct, and help contribute meaningfully to progress in tackling greenwashing. It allows them to engage with their portfolio companies directly to flag concerns, ask the right questions, and allocate capital accordingly.
Climate change is a systemic issue – one that cannot be solved by companies, consumers or investors alone. Legislation and regulation will be crucial to tackling it.
In the meantime, to separate the green from the glitter, transparent ESG risk data is key.