Global ESG assets are on track to exceed $53 tn by 2025, representing more than a third of the $140.5 tn in projected total assets under management. But as demand for ESG-branded products grows, greenwashing (false or misleading claims about a company’s environmental impact) has become commonplace. A forensic analysis by Morningstar resulted in the ESG tag being removed from more than 1,200 funds – roughly one in five reviewed.
The risks associated with greenwashing are set to grow. In late 2021, the EU introduced an anti-greenwash rulebook, the Sustainable Finance Disclosure Regulation. As the world’s most advanced jurisdiction on ESG, Europe’s anti-greenwashing efforts will act as model legislation for other jurisdictions to follow. Soon, greenwashers will have nowhere to hide.
So how do we detect greenwashing when reviewing ESG strategy and reporting? There are four common signs.
There is nothing wrong with business leaders taking a stance on social issues. In fact, consumers like it: an overwhelming 86 percent of us think CEOs should publicly speak about problems in society and 68 percent think CEOs should step in when the government fails to fix them.
But companies get into trouble when they virtue-signal support for a cause while acting in ways that undermine the credibility of their commitment. Take State Street Global Advisors, which commissioned the Fearless Girl statue to promote a fund for companies with a high percentage of female leaders. The financial giant was later found to be underpaying its own female employees.
Another example is the decision by several companies, including P&G, YouTube, BMW and Mercedes, to proclaim their support for Gay Pride month in the West, while remaining silent on the abuse of LGBTIQ people in the Arabian Gulf and parts of Africa, where hundreds of gay men remain in prison.
It’s not brave to stand up for social justice when the overwhelming majority of your market agrees with you; courage comes from taking a stand when it doesn’t. As the philosopher Judith Shklar argued, cruelty is the worst of human vices, but people are least forgiving of hypocrisy. Corporate PR teams take note.
2. Evidence-free ESG reporting
Greenwashing businesses routinely underinvest in their ESG reporting, using corporate spin as a proxy for a real strategy and progress against it. You can identify a shoddy report by looking for:
– Vague language: An SASB survey found that companies used generic language 53 percent of the time when addressing an ESG topic
– Clichés: Even one damages credibility (‘Our people are our greatest strength’). Their inclusion is often a sign the company does not have evidence-based targets and metrics to support its ESG claims
– Jargon and marketing spin: Synergize, ideate, thrive, elevate, ignite, leverage. A report is a strategic document, not an advertising campaign. Salesy gibberish is the mark of most greenwashers – for example, ‘Our digital innovation unleashes the creativity of the diverse world around us, allowing us all to thrive’
– Using the UN Sustainable Development Goals (SDGs) as a brand element: Many companies think slapping the colored squares of the 17 SDGs into their report absolves them of the need to develop an ESG strategy. Sustainability leaders include SDG targets (not just goals), and an explanation of how they relate to company strategy.
3. Competence washing
Until recently, most boards and executives were disinterested in ESG and, as a result, limited their investment in the sustainability function and its employees. This sent a signal to talented staff: if you want to advance in the organization, look elsewhere.
Things have changed, driven mainly by investor pressure and young employees. Millennials and Gen Zs are set to comprise 75 percent of the workforce by 2025. Their zeal for purpose-driven work marks a generational – likely permanent – shift in how companies think about attracting talent and capital.
Today, almost every business claims to be sustainable. But dig deeper and you might find there is no senior leader with experience in the field. This is known as competence washing. One form involves appending ‘sustainability’ to the end of an already long executive title, such as head of corporate affairs, communications and sustainability. Another is to place an internal employee from an unrelated field into a newly created head of sustainability role.
In truth, there is a shortage of quality ESG professionals. The solution is not to fabricate in-house capability and hope stakeholders don’t notice. Companies capture the benefits of ESG when they spend time and money hiring an expert, and then develop talent from within (or hire consultants) to support that person.
4. Dubious net-zero targets
The concept of net-zero is simple: by a certain date, the pledging company or government must absorb as much carbon as it emits. Everything else from this point is complicated. There is no agreed definition for what net-zero means. Companies bandy phrases about without understanding their meaning: nature-based, climate-neutral, Paris-aligned. As the Net Zero Tracker project lead John Lang says, there is an information vacuum on what constitutes a credible net-zero target.
The most common form of underwhelming net-zero pledging occurs when a company promises only to reduce its Scope 1 and Scope 2 emissions – pollution that comes directly from its day-to-day operations and energy use. This selective target-setting omits Scope 3: the carbon emissions created across a company’s entire value chain.
Recent analysis of the climate pledges of 25 of the world’s biggest companies found just three – Maersk, Vodafone and Deutsche Telekom – that demonstrated a clear commitment to reducing all emissions by more than 90 percent. Many others were accused of embellishment. Google, apparently carbon-neutral since 2007, was criticized for omitting its Scope 3 emissions, which constituted 60 percent of the company’s greenhouse gas emissions in 2020.
Another underwhelming example is the target developed by ACI Europe, an organization that represents more than 500 European airports. Its net-zero target for 2050 covers only buildings and operations, and is estimated to capture just 2 percent of all aviation activities that pass through its airports.
If a company does not include Scope 3 emissions, its net-zero target is essentially useless.
Offsetting is another problematic feature of net-zero commitments. The practice often allows companies to choose a superficially ambitious target (set decades into the future) by paying third parties to offset their emissions. Planting trees, sequestering carbon or investing in nascent carbon capture and storage technologies are all common approaches.
The concept of offsetting – while necessary in the short term, especially for hard-to-abate industries – is riddled with flaws. Most fundamentally, it relies on the faulty assumption that environmental harm can be alleviated in one place by doing environmental good elsewhere. Ecosystem health cannot be horse-traded.
It’s also hard to regulate. Business and governments routinely buy low-quality offsets from projects that would have been built anyway (such as government-mandated renewables projects in India and China), offsets are routinely double-counted and other projects (such as tree planting) sometimes oversell their climate benefits.
So what does ‘good’ look like? While imperfect, BWD recommends companies commit to the Science Based Targets initiative. Targets are considered science-based if they align with what the latest climate science deems necessary to meet the goals of the Paris Agreement (limiting global warming to well below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C).
If you seek corporate inspiration, look to Microsoft. The company has an achievable plan to be carbon-negative by 2030, grounded in science and mathematics. By 2050 it has pledged to neutralize all the carbon it has emitted since its founding in 1975. No other globally significant company compares.
Luke Heilbuth is CEO of BWD Strategic