Greenwashing 101
Greenwashing is simply any ‘misleading propaganda to try to promote the perception that a company’s products, objectives or policies are environmentally friendly, to increase its profits.’
With pressure for climate action coming from all sides, many companies are under even more pressure in 2021 to at least create the perception of sustainable business practices. According to an EU study 42% of all green claims in European companies marketing materials were exaggerated, false or deceptive. This ‘rising tide’ of greenwashing, as Aviva Investors puts it, is troubling as it can undermine the great progress many companies are actually making on sustainability. Greenwashing practices can even damage entire sectors, as responsible investors look for truly sustainable investments. In fact, investors, shareholders and stakeholders are demanding ever more transparent non-financial reporting backed by data and aligned with business purpose. Lawyers recently labelled the oil and gas sector as guilty of a ‘great deception’ due to its rampant greenwashing devoid of relevant data.
Why should you care?
One big reason is investor and regulatory pressure. A recent study found that 44% of investors cited greenwashing as their primary concern when it came to ESG investments. It’s therefore crucial that your own management team understands how to avoid this trap, to protect your business and investment offerings from reputational damage. Litigation risk and activist investor disruption are increasing, and regulations are on the way too. In the EU there are new imminent regulations designed to force companies to substantiate their green claims with evidence under the European Green Deal. In the US an SEC taskforce has been set up to, among other things, ‘proactively identify ESG-related misconduct’.
Litigation risk is not just a future concern for boards to consider either. Chevron recently came under attack by NGOs for its baseless claims about its action on climate change. In fact, the Federal Trade Commission said the firm were “egregiously misleading consumers”. This is a great way to lose trust with your current and future investors. To avoid this mistake boards must understand their real-world impact and report it honestly. This means assessing your business impacts, strategies and our business model overall.
It’s about opportunity as well as risk
Get a good governance structure in place, one that’s fit for purpose, and you will not only eliminate the risk of greenwashing, but create real shareholder value for your business.
Over half of investors say they are ‘open to responsible investments in the future’. According to BlackRock’s Larry Fink, companies that don’t adopt sustainable business strategies can expect less investment as shareholders become more driven by topics such as climate change. However, Fink also believes sustainability must be aligned with corporate purpose. It is vital therefore that companies know how their purpose influences sustainability impact. Aligning sustainability strategies with corporate purpose (and vice versa) helps companies avoid greenwashing by generating meaningful action that’s relevant to stakeholders and investors. Tackling greenwashing is therefore not just about risk management, at its best it can enable the creation of long-term value creation opportunities. To best access these opportunities boards and teams must have a governance structure that values sustainability and that inputs sustainability knowledge into decision making processes. With everything you do on sustainability the question must be, how does the work you do align with your reason for existing as a company? Answering this question may change how you govern, how you do business, and it will likely also change how you communicate your impact.
Take action!
Related to governance is the importance of boards taking relevant action. That is, action that is tied up with your actual sustainability impact. Examples of greenwashing in recent times have included companies talking up sustainable action that is actually irrelevant to their business model. Take BP for instance, which came under fire recently for its focused advertising on its low carbon products, despite 96% of BP’s spend going on oil and gas annually. This is not just incidental, it’s a critical litigation risk. Chevron
A Swiss study using AI recently found that many companies were ‘cherry picking’ non material climate risks to meet the requirements of the Task Force on Climate-related Financial Disclosures (TCFD). This is not how companies should tackle climate change and is a Pyrrhic victory for two reasons:- It doesn’t address climate risk accurately, which can erode long term value creation, and secondly it erodes trust with investors and regulators.
Reporting: taking an evidence based KPI approach
When it comes to financial reporting it’s hard to fool investors and readers about your performance. However, for Non-financial reporting the lines can often blur. Many companies are tempted to make grand statements about their sustainability strategy or their focus on diversity without real data to back up their statements. From working with our clients we have observed that many ESG strategies formulated by management teams are weak on detail. Having a diversity statement for instance is not enough in 2021. Management needs to actively manage how to improve diversity and have a baseline to work from and understand the demands of the communities they serve and operate within.
Recently many companies are trying to communicate how they tackle sustainability by aligning their Non-Financial reporting to the Sustainable Development Goals (SDGs). However, a recent study cited by the UN of over 700 multinational companies found that 72% of company sustainability reports mentioned the SDGs, yet only 23% provided meaningful key performance indicators (KPIs) and targets for SDG related action. It’s understandable that companies want to utilize ESG reporting as a way to access the rise in ESG capital, given that global ESG focused assets are set to exceed $53 trillion by 2025. Yet, the companies that will benefit from this are not the ESG greenwashers. ESG and Climate impact capital will go to companies that demonstrate impact with relevant case studies and metrics that show how their plans to meet ESG and climate related targets are actually delivered.
Read more on how ESG can add value to your business here-
https://www.thethrivebusiness.com/thrive-perspectives/creating-value
by James Byrne for Thrive