Greenwashing is impacting faith in ESG – can data be the saviour?

Greenwashing is impacting faith in ESG - can data be the saviour?

Greenwashing is still a widespread problem. As the pressures increase for firms to act sustainably, both through regulation and customer expectations, there is a risk more will look to embellish their green efforts.

In a recent survey from Google Cloud, 80% of 1,491 executives across 16 countries claimed their organisation was above average for environmental sustainability. Furthermore, 86% said their efforts are making a difference in advancing sustainability. Despite this vote of confidence in themselves, 58% of respondents said their organisation has overstated their sustainability efforts. When exclusively looking at executives within financial services, this percentage jumps to 66%.

One final important stat from the survey is that only 36% of respondents said their organisations have measurement tools to quantify their sustainability efforts, and just 17% use these to optimise their efforts.

Unfortunately, greenwashing has been around for a long time. Having been first coined in the 1980s by Jaw Westerveld, many companies have since tried to hide their harmful practices behind more positive ones.

Tariq Desai – senior manager at ESG reporting company Position Green – said, “What I think has changed in recent years is that there is more information available, with more people being aware of the issues and investors taking ESG seriously. I think this has led to more unsubstantiated claims being uncovered, making it seems as if there’s more of it going on. The recent revelations regarding carbon offsets often not having any value are a good example of something that would not have even been looked into previously.”

Regulators around the world are making moves to tackle greenwashing claims. For example, German authorities raided the offices of Deutsche Bank and DWS due to allegations of greenwashing, while the US Securities and Exchange Commission fined the management arm of Bank of New York Mellon Corp for misleading claims.

“The problem here is resources and competence. As regulators have only recently taken greenwashing seriously, they have not developed the same level or resources and competence as they have for assessing misleading financial claims. I think competence here is key, because it is difficult to assess whether an ESG claim is true or not without fully understanding what ESG means and what industry standards on this sort of data is. Of course, transparency in data will help authorities close this competence gap.”

Work is being done by regulators to improve their knowledge of greenwashing. For example, the European Supervisory Authorities recently reached out to the market for examples of greenwashing. The aim is to gather information and understand how greenwashing cases materialise, develop and the risks they bring.

The UK’s FCA is also making a move against greenwashing. Last year, the regulator proposed new measures to tackle the problem. The aim is to combat “exaggerated, misleading or unsubstantiated claims about ESG credentials damage confidence in these [investment] products.” As part of this, it is considering sustainable investment product labels that would give consumers confidence in the products.

While more is being done to prevent it, this is only the start. OakNorth Bank director of ESG strategy Matt Bullivant stated that as efforts towards sustainability and decarbonisation increase, more firms will look to showcase their green credentials and identify commercial opportunities. Some of these efforts could cause greenwashing, either intentionally or not.

He said, “We should remember that greenwashing can arise in different forms – those of greatest concern are cases where there is a deliberate intention to deceive, but it can also arise where genuine green ambition is failed to be realised or delivered, and where there is simply a lack of knowledge or understanding of what constitutes authentic, accurate and identifiable green credentials.”

How harmful is greenwashing

The biggest impact greenwashing has is on the consumer’s trust. If a company is found to have been lying, it hurts their brand reputation and could see them lose customers. However, it even risks damaging the public’s trust around genuine ESG-related initiatives and products. Worryingly, a report from cloud banking platform Mambu found that 67% of global consumers believe their current financial institution is guilty of greenwashing.

“Excessive greenwashing can undermine confidence in the claims behind sustainable products, ultimately putting customers off supporting supposedly greener options, which cannot be a good outcome for those offering genuinely positive impact,” Bullivant said. “Businesses face similar concerns, with uncertainty over what does or doesn’t qualify as green now creating a phenomenon of “greenhushing”, where those making good strides towards more sustainable practices are unwilling to reveal as much for fear of retribution or misinterpretation.”

Desai echoed this, stating that greenwashing is primarily destroying trust. “If you sell green paint but everyone thinks it looks black, no one is going to buy it, no matter how much you tell them it’s green,” Desai said. “Those of us who believe in the value of ESG have to make sure that it can be trusted. This isn’t just about greenwashing but about consistent standards, about clearly communicating what ESG means and what its purpose is.

“Right now, no one outside of our bubble is really sure what ESG is, and that breeds distrust, which I think has led to the recent backlash against ESG. Greenwashing has contributed to this but the bigger picture also needs to be addressed.”

As for what repercussions should face firms that fall foul of greenwashing, Desai said it is tough to know what the right route is. For those that intentionally misled customers and investors, the company and directors should be held responsible.

Whereas, when greenwashing is caused by putting a positive spin on something or lacking clarity that leads to confusion, Desai believes the market should decide the consequences. “Investors and customers are becoming savvier in assessing these claims and will punish companies accordingly if they think they are being misled.”

Using data to combat greenwashing

While regulations and the threat of fines will help combat greenwashing, it is not enough on its own. Without being able to substantiate a company’s claim, it is hard to know whether they are accurate. Another difficulty firms might face in their ESG efforts is what their supply chain or third-parties are doing. The answer to this is data collection.

Desai stated that data collection ensures companies can gather data across supply chains, analyse that data and make it actionable. By using established data providers, Desai added, firms can ensure the data is accurate and remove the risk of errors in calculations.

Both Desai and Bullivant agreed that transparency is the answer to tackle greenwashing. Bullivant stated that firms should share visibility of the methodologies, sources and impact of green products, both in terms of use and production. This will remove the risk of making misleading claims or assumptions. But to achieve this, they will need to have good data sources that go deep into supply chains and can identify fundamental sources behind their services, as well as their climate impact.

“Greater clarity, visibility and openness about green claims, and hard data to substantiate them, ultimately brings credibility and confidence to sustainable disclosures,” he said. “Regulators are beginning to pick up on the threat of greenwashing, with legislation such as SFDR in Europe now aimed at reducing greenwash, and global adoption of TCFD recommendations focusing on greater clarity, detail and metrics to support climate matters.

Desai went further than just transparency, stating the industry needs to have “transparency, consistency and assurance.” Expanding upon each of these, Desai said that transparency in data means it is easier to spot companies not acting correctly. As for consistency, having a standardised method of reporting for all companies, including in their methodologies and calculations, would mean it is easier to see outliers. As for assurance, Desai stated that having an independent third-party to assess claims and reporting would add a higher level of scrutiny that has been reserved for financial reporting.

“I think the industry needs to work on building trust and that means opening up a bit more, working together and putting claims up for scrutiny.”

The future of greenwashing

Looking ahead to the future, both Desai and Bullivant were confident of how greenwashing will be tackled. As consumers and regulators become more aware of incidents and how to spot when things are amiss, it will be harder for companies to intentionally greenwash.

One thing Desai would like to see in the market is that industries work together to solve problems and work on common standards, as well as lifting each other up in regards to ESG data. “I see the industry holding itself to account and making sure it has the highest standards possible.”

Position Green is hoping to lead by example. It recently helped an initiative among Swedish real estate companies that have developed a joint framework for supplier monitoring, helping to ensure sustainable suppliers.

Desai concluded, “I’m quietly confident that greenwashing will reduce, maybe not near term but in the mid-term. There is going to be a period that, as transparent and traceable data is taken more seriously, more greenwashing allegations will emerge, and more companies may be implicated. But this is only a symptom of greenwashing being tackled and industries wanting to ensure high standards in ESG reporting and data collection.”

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