A surge in greenwashing in the past year revealed by a new survey has highlighted the need for better data and metrics to help investors nurture the companies and project that will bring about net-zero and other sustainability goals, the report’s author has said.
This year’s edition of ESG data science provider RepRisk’s annual greenwashing report showed that a quarter of all climate-related ESG risk incidents it had identified among publicly listed companies in the past 12 months were linked to overstated sustainability claims. That figure is up from one in five last year and was replicated across sectors and geographies, the survey showed.
The trend was most pronounced within the banking industry, where a 70 per cent rise in greenwashing incidents were identified, almost solely driven by the institutions’ financing of the oil and gas industries.
While the data presents a damning picture of the ESG space, RepRisk said it attributes the rising number of detected greenwashing incidents to an increase in the scrutiny of sustainability claims. What the survey can’t show is that solutions to reducing the problem already exist.
“The good news is that there’s a lot happening to address it,” Alexandra Mihailescu Cichon, Chief Commercial Officer at RepRisk told ESG Insight. “There are a lot of things to be hopeful about. But we’re in a transition until we have all the puzzle pieces together.”
Seeking Answers
Among the solutions is the data, data infrastructure and vendors that can provide investors with the tools to make better-informed decisions that will benefit the environment and society. While Mihailescu Cichon accepted that ESG data quality is still lacking, she said that information is increasingly available to help financial institutions and that the situation would improve with the establishment of unified global reporting standards into law.
“Until we actually have those standards and the regulations in place, people are operating in a bit of a nebulous situation here,” she said.
RepRisk chief executive and co-founder Philipp Aeby said that the survey shone a light on the need for better data.
“The expectation of competitive advantage derived from an image of sustainability has opened the door to green and social washing,” he said. “Banks, asset managers, investors, and other market participants need transparent data on adverse impacts to assess a company’s true business conduct and mitigate green and social washing risk in their portfolios and supply chains.”
Green and Social Washing
RepRisk provides ESG data to clients based not on company disclosures but publicly available independent sources. Among its services, the company offers reports on ESG risk incidents around the world, which form the basis of the survey’s research methodology.
Analysis of the results found that banks performed poorly in the survey because of their continued funding of the fossil fuel industry, and that the main cause of greenwashing in general was the inclusion of carbon offsetting strategies. These might include carbon capture programmes via the planting of new trees.
Such ploys have come under recent criticism as an ineffective way to reduce carbon footprints. The controversy they have stoked has led some asset managers, including Norway’s NBIM – the world’s largest sovereign wealth fund – to shun investment in any company that includes carbon offsetting in its net-zero pathway.
“There’s so many ways that this has been looked at as part of the solution, and now the tides have changed; now it’s seen perhaps as a conduit for greenwashing rather than being part of the solution,” said Mihailescu Cichon.
Among the RepRisk survey’s other significant findings is that a third of all greenwashing incidents are also linked to “social washing” – the misrepresentation of alignment with social improvement goals. These incidents were largely attributable to human rights abuses in the form of data privacy breaches and poor employment conditions within corporate supply chains.
Existential Threat
The survey’s finding may make for grim reading but Mihailescu Cichon says it is critical that the ESG space is scrutinised in its infancy to ensure structural weaknesses are removed before they become baked in and harder to remedy at a later, more mature, stage of its evolution.
“It sheds a light on the challenges and the explains a lot of the reasons why there is potentially a backlash against some of these topics, but it also gives us insight into what can be done to address them,” she said.
Combating greenwashing has become an existential necessity as an anti-ESG movement stoked by conservative political forces is keen to seize on any bad news to discredit the sustainabile finance concept. More fundamentally, Mihailescu Cichon said, it needs to be eliminated to preserve the credibility of the ESG cause.
“Not only does greenwashing erode trust, which is very critical, but it distracts us from actually working on some of the solutions that would actually have the positive impact many people are looking to have or reducing the adverse impacts that we’re having,” she said.
“Once trust is eroded there’s more likelihood that people will start to throw the baby out with the bathwater and just say, well, all of it must be greenwashing. That’s a bit of a slippery slope that we’re on right now.”
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