Derrick’s Take On: ESG and Greenwashing
Throughout my internship, I have delved into the world of Environmental, Social, and Governance (ESG) disclosures. I am excited and cautiously optimistic about its potential. However, establishing ESG does face its fair share of challenges, such as patchy regulations, the lack of synchronization, opposing lobby groups, and a lack of understanding the dizzying maze of acronyms and jargon, such as CSDDD, ISSB, SASB, CDP, TCFD, TNFD, IIRC, ESRS. In this article, I want to explore one potential pitfall and critique of ESG regulation: greenwashing.
Given the relative novelty of the concept, there is significant criticism among proponents and opponents of ESG alike. One critique that deserves attention is the concern that a strong focus on ESG scores may promote greenwashing, meaning that companies may be pressured to prioritize high scores by any means necessary, potentially leading to a narrow focus on numbers without considering the broader context. However, it is essential to recognize that having ESG and related regulations provides a valuable framework for assessing and understanding claims, which cannot be underestimated.
To counter the temptation for greenwashing, the European Union has proposed the Green Claims Directive. This directive mandates that claims about the sustainability of a product or a service must additionally be supported by verifiable evidence. These measures are intended to make it more attractive for companies and investors to promote genuinely sustainable investments, and not just to give a product or brand a seemingly green coat of paint. At the same time, the United States, the Securities and Exchange Commission (SEC), is currently working to expand the so-called Fund “Names Rule” to include ESG-labeled investments. This amendment to the Fund Names Rule would require that the sustainably themed portfolios or brand names must accurately reflect this focus on sustainability in their investments. At least 80% of their assets would have to be invested in sustainable projects, to ensure an alignment between the fund’s name and its actual investments, and to attract investors who prioritize sustainability.
In addition to greenwashing, I have come across closely related terms such as greenhushing and greenwishing. Greenhushing refers to situations where companies refuse to disclose information about their ESG goals, often due to concerns about low scores and potential investor backlash. This lack of transparency limits stakeholders‘ understanding of the company’s sustainability efforts. On the other hand, greenwishing occurs when companies set ambitious sustainability targets that exceed their capabilities, creating unrealistic aspirations. To address greenhushing, mandates for industry-specific disclosures and other measures can be implemented. As ESG standards and frameworks continue to strengthen over time, we can work towards tackling greenwishing as well.
Taking ESG regulations and sustainable investments seriously that emphasize the importance of independent, third-party auditing and reviews to ensure the credibility of ESG data and reports and thus promote fundamental changes to our economy and industry to more sustainable means of production is the only way, if we are completely honest with ourselves.
If we want to preserve our environment and thus our livelihoods, we must take crucial steps towards achieving a sustainable, green economy, even if the transition may be slow and imperfect, and hard. But it is important learn from our experiences and then apply these lessons learned, to continuously improve our future.
Derrick Adams-Slutkser (20/07/2023)