One in five cases of ESG risks linked to greenwashing

One in every five cases of corporate risk incidents linked to environmental, social and governance (ESG) issues stems from greenwashing and misleading communications, new research has found.

One in five cases of ESG risks linked to greenwashing

RepRisk, a leading ESG data science firm, analysed ESG risk incidents, ranging from a potential violation by a company or specific project of global standards and frameworks. RepRisk found that, over a two-year period, one in every five of these risks was linked to greenwash.

Lobbying and offsetting were identified as two of the major contributors to cases of greenwashing. While the role of offsets and potential greenwashing side effects are well documented, lobbying is much harder to uncover and isn’t often included in self-disclosure.

RepRisk also found that in the food and beverage sector, greenwash is linked to one in every three risk incidents. There are numerous high-profile examples in this sector including Innocent Drinks, and Coca-Cola and Unilever.

RepRisk notes that businesses should work to spot risk of miscommunication issues early to avoid potential conflict and issues later down the line.

“Greenwashing is no longer a trivial offense. Those who sell their products as ‘ESG compliant’ must ensure they’re fulfilling that promise – and they can expect significant fines in the future if they don’t. This is bad for them, and bad for their investors,” RepRisk’s chief executive Philipp Aeby said.

“The challenge in identifying and mitigating greenwashing is two-fold: the first is looking beyond the tick-box framework manner of self-reporting which allows companies to claim ESG compliance when that may not be the case. The second is bridging the knowledge gap regarding the actual behavior of companies. This involves going beyond inconsistent ESG ratings which make it difficult to distinguish between those with truly sustainable operations, and those that are misleading and miscommunicating – for example those publicly committing to climate action, but masking continuing issues that are out of sight further down the supply chain that could reverse progress on their climate action promise.”

Greenwash gap

At the start of the year, a survey conducted by consultancy Alcumus found that many finance firms felt they lacked competent guidance and frameworks on ESG and reporting to combat greenwash.

The survey, which polled 621 senior managers, found that 90% of the respondents said their business had included ESG considerations in its overarching strategies. And, among those who said their business hadn’t made this inclusion yet, 43% said there are plans to do so by 2025.

However, half of the respondents feel deterred from investing more into schemes that would improve ESG outcomes. The most commonly cited deterrents were a lack of technical understanding of related issues and ways to track impacts and outcomes, and a lack of guidance from regulators.

It is noteworthy that both of these challenges have led to accusations that some firms are using ESG terminology as greenwashing or purpose-washing in recent months. The fact that there are a huge array of ESG-related standards, metrics and rankings makes performance difficult to compare, for example. Moreover, a narrow focus on too few parts of the ESG agenda could cause negative impacts elsewhere. 47% of those surveyed by Alcumus said their business is not acting on all three aspects of ESG at a strategy level.

On the other side of the investor corporate relationship, a survey of 325 investors with more than $14trn in assets under management collectively has revealed that more than half (60%) do not trust the information they get through ESG rating frameworks.

Conducted by PwC, the survey found that just one-third (33%) of the investors think the quality of ESG reporting they are seeing is good. A similar proportion (29%) said that current reporting adequately considers how ESG performance will impact a business’s bottom line.

Partly because of these perceived shortfalls in quality, most investors (60%) say they do not trust the information they receive through ESG ratings and scoring systems.

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