With impacts of the climate emergency intensifying, companies have new opportunities and incentives to showcase their green credentials, making net zero pledges and signing climate commitments. But when do promises escalate past the point of credible claims and into greenwashing? And who is providing the oversight and accountability to ensure companies are ‘walking their talk’?
An existential problem in ESG
The biggest threat to ESG being taken seriously is the misallocation of capital based on empty promises. While climate pledges and carbon offsets have made for good public relations, the responsibility of ensuring that climate commitments are on track has fallen to regulators, consumers, and investors, to try to separate fact from fiction and to make sense of what companies are doing on the ground. The consequences of getting accountability wrong are significant.
Our company, RepRisk, recently analyzed 10 years of greenwashing data to learn how pervasive the issue is. Greenwashing significantly increased following the signing of the Paris Agreement in 2015, and in the past two years, one in five climate-related ESG incidents was also linked to misleading communication, including greenwashing. In the food and beverage sector, the rate increased to one in three.
The ESG market has recently been criticized for a lack of clear purpose and misalignment between ESG investments and sustainability goals. This shortfall in consistency and large variations in impact, combined with the lack of oversight, have raised an important question at the heart of the matter: how can ESG support transitioning our financial markets to a more sustainable and fairer economy?
Finding meaning in ESG
The way forward requires alignment and transparency. Regulatory frameworks like the Sustainable Finance Disclosure Regulation (SFDR), are stepping in to clarify what we mean by sustainable investments to better manage consumer expectations and to clarify what is meant when a fund is labelled as “green” or “ESG.” Further, a risk-based approach to ESG can provide the insights required to understand whether companies that are committing to green initiatives are not at the same time reversing their progress. This type of standardization and oversight is necessary to help make it easier to spot greenwashing and ensure that investments are being allocated as intended.
The future of ESG requires high-integrity data and sophisticated analyses by professionals who can go beyond company disclosures and single materiality to understand the impact companies have on the planet and its people. Navigating ESG will require a focus on sustainable outcomes and replacing short-term strategies with long-term ones.
The court of public opinion has already delivered its verdict and will not accept companies benefitting from putting up a green façade while doing nothing in the face of climate change. A company’s intent to be greener and do better is not enough. What is required is accountability for impact to ensure that companies are doing the right thing and getting it right.
Guest Contribution by Philipp Aeby, Chief Executive Officer of RepRisk