Greenwash & ESG

Greenwash and ESG (Environmental, Social and Corporate Governance) are broad and important topics for the transition to a less polluted and more efficient world. Greenwashing, communicating an ecologically responsible image of an organization when it is not the entire picture, and ESG, relate to the culture and values of an organization. Actions taken shape the brand of the corporation to employees, customers and the market at large. However, transitioning to a greener and more inclusive world is rarely easy. A competitive global economy and capital flows lead companies to maximize profit in the short term, without accounting for negative externalities. Meanwhile, clients, consumers and regulators demand less pollution, extraction and improved social impact. These two forces are often opposing.

The corporate responsibility movement was born out of the effort to include a consideration of “people” and the planet into the company’s core objective of producing profits: almost to make the one dependent upon the other. People, Planet, Profit (PPP) evolved into ESG by incorporating Governance as the mechanism of achieving corporate responsibility through the inclusion of diversity, equity and inclusion (DEI[61]), understanding that profit would always be a key tenet. The term ESG was first popularly used in a 2004 report titled “Who Cares, Wins,” a joint initiative with financial institutions led by the UN Environment Programme,[62] and became prominent after 2015 with the mass acceptance of the UN’s guiding principles, the 17 Sustainable Development Goals (SDGs[63]). ESG adoption followed as the investor community took a strong stance in corporate shareholder meetings, demanding more transparency, in particular when it became understood that stock performance and risk management could improve with better ESG policies.

While ESG has grown to become much more than a movement breaking into corporate boardrooms, results have been limited. Companies, feeling the pressure, have resorted to colossal levels of greenwashing, exploiting the public’s lack of real knowledge about environmental and social matters. Sustainability and corporate responsibility is often delegated to marketing teams or even outsourced to PR companies with few actual improvements to show for at the core. This has led to a great deal of confusion at the consumer level and frustration at large. Much more transparency is required and establishing ESG disclosure requirements across the public and private markets can lead to great advances, such as incorporating tools likes the Global Reporting Initiative[64] (GRI,) CFA Institute[65], and the Task Force on Climate-related Financial Disclosures (TCFD[66]) to name a few. The proposed rule by the United States Securities and Exchange Commission (SEC) on disclosure of greenhouse gas emissions can be a significant step. The disclosure suggests that reducing greenhouse gasses or minimizing exposure “can have an impact on public companies’ financial performance or position and may be material to investors in making investment or voting decisions.[67]” The disclosure would involve: Scope 1, for direct GHG emissions; Scope 2, for indirect GHG emissions including purchased electricity or other forms of energy, and; Scope 3, for upstream and downstream activities in its value chain, if material. For further reading on this specific proposal see BlackRock’s response “BlackRock supports consistent climate-related disclosures; urges global coordination.[68]”

While the SEC does not require the purchase of carbon credits or offsets, it establishes a trend of requiring companies to expose their negative externalities to investors and other market participants. This is likely the first step in requiring greater disclosure with regard to other negative externalities such as waste and social matters under a broader umbrella of ESG disclosures. Access to information is a very positive trend, even if it causes a lot of work in the short term for companies. It will force executives and their teams to take a look inward and better understand the broader impact of their operations. It will affect culture, create restraint with regard to greenwashing and establish better trust, bringing society closer to its business. We support mobilizing disclosure requirements globally and believe it will accelerate positive change around the world, and we look forward to contributing in this regard.

61. Wikipedia: Diversity, equity and inclusion site

62. UN Environment Programme & IFC Advisory Services: “Who Cares Wins, 20014-08 issue brief.

63. UN SDGs: 17 Goals for People, for Planet agenda

64. Global Reporting Institute: site

65. CFA Institute site: ESG Disclosure Standards for Investment Products

66. TCFD - Task Force on Climate related Financial Disclosures site

67. Securities and Exchange Commission: proposed rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors

68. BlackRock Policy Spotlight - Blackrock supports consistent climate-related disclosures; urges global coordination