Paying attention to ESG factors is beneficial to companies. Investors will like you, rating providers will give you a high score, banks may give you more favourable rates and consumers will buy your products. But how much of companies’ ESG — or environmental, social and governance — claims is actually true?
If investors or consumers blindly purchase products and services without reading the fine print, they may fall prey to greenwashing. Even if they do their homework, they might find themselves struggling to find information that can help them discern whether a company is truly ESG compliant.
Many a time, sustainability reports are littered with elaborate narratives and photos, but not supported by data. Worse still, advertising materials by some companies claim that their products are environmentally sound without giving any evidence.
The good news is, businesses may not be able to get away with greenwashing for much longer. Increasingly, the spotlight is being focused on companies that practise this. A recent case is allegations of greenwashing by Deutsche Bank’s fund management arm, DWS, which made headlines.
Investors and consumers are increasingly educated about ESG and scrutinising businesses’ claims. Litigation and shareholder activism cases on ESG claims are gaining traction.
Transparency is key. The thing is, not every business out there is intentionally greenwashing the public. False information is an obvious sin, of course. But the current lack of information could also be due to insufficient resources for gathering data.
Still, that does not excuse businesses from being transparent about what their limitations are and from engaging with third parties who can point out their shortcomings, so they can improve.
On the other hand, investors and consumers have to understand what ESG is. ESG involves all three categories of environmental, social and governance issues. ESG compliance is a journey and cannot be done in one day, and there are different ways to build ESG funds.
The latter point means that an ESG index or fund might have fossil fuel companies in it, depending on the objective of the fund. A popular strategy is to invest in sectors with high ESG risk and engage with the companies, in order to help them transition.
Investors must understand what they want. If you want to completely avoid carbon-intensive sectors, you might have to look for thematic funds. If you believe that investing in companies that are doing the most in their sector to adopt ESG is good, then you can look for funds with that strategy.
Also, look at what the fund invests in. A recent trend is ESG funds that invest predominantly in tech companies. Given concerns over the tech giants’ monopoly in the market, and allegations of tax evasion and a lack of gender diversity in the sector, are you comfortable with these funds even though tech companies, given the nature of their business, tend to produce lower emissions?
Ultimately, businesses should know that all eyes are on them as the public becomes more concerned and educated about ESG matters.
ESG is not just a reporting exercise. Reducing emissions under the environmental pillar can contribute to a better future, especially for the younger generation, who will be facing the brunt of climate change impacts.
Having good labour policies or gender diversity promotes employee well-being, loyalty and productivity. Good governance, obviously, ensures the company’s longevity.
Also, only doing corporate social responsibility projects will not help you become ESG compliant. The public must understand that too. Lastly, investors and consumers should keep educating themselves so as not to be taken in by greenwashing practices.