Companies need to talk about the negatives of their business

(ATF) With every new trend comes the counterfeiters. Those that want to reap the benefits of the increased interest in sustainability but not do the actual work. In the ESG world this is known as. greenwashing.

The term “greenwashing” was created in the 1980s when companies professed – via media and advertising – to be kind to the environment, while actually engaging in environmentally unsustainable practices. Oil and gas companies were seen as examples of this.

Today, greenwashing has become more sophisticated, aided by the lack of a universal definition over what constitutes good corporate behaviour, and consequently, what are eligible investments for funds that use the label ‘sustainable’ or ‘ESG’ – adhering to Environmental, Social and corporate Governance principles.

This ambiguity plays into the hands of companies purporting to exhibit ESG-friendly practices. Companies are aware of the premiums they can extract from the market if their products or services are deemed green or sustainable.

However, knowing whether or not a company – or fund – really ‘walks the talk’ requires in-depth knowledge of management quality, supply chain practices, corporate culture, labour relations and environmental impacts.

These days that is a complicated analysis. There are no common standards across ESG investing making it difficult to assess if such funds are actually invested in sustainable companies or not.

The growing demand for sustainable products provides an opportunity for companies to demonstrate that ESG is not a handy marketing acronym for asset managers but an integral part of how a company takes its corporate purpose seriously to generate value for all stakeholders.

The oil and gas sector has often been accused of ‘greenwashing’. Reuters file pic.

Are they ethical?

Nevertheless, whether it is mining companies making claims about their ethical stance, or fashionable clothing companies touting their position against climate change while relying on cheap labour or worse to produce their clothes, there are issues with establishing the commitment of some corporates against their apparent ESG credentials.

People have different interpretations of what ESG means. Greenwashing is an accusation directed at companies but ESG should never be just about what a company is disclosing but what it is actually doing.

Wittingly or unwittingly, those monitoring responsible investments are also contributing to the confusion around standards. This is because companies such as ratings agencies designate ratings based on their interpretation of a company’s actions.

Such agencies produce conflicting metrics of analysis, which can allow less scrupulous corporates to ‘game’ the system in their favour to garner high scores for their ESG awareness and adoption. And as companies publish more and more data in order to get a good score, there is a danger such ratings become little more than a label or, worse, a box-ticking exercise.

It is not just about everyone trying to claim their virtue – but it is finding a better way to be transparent in what companies and investment managers can report. This would give clients a better understanding of exposures in their portfolios so they can then make better, more informed choices.

More useful in establishing a business’ true ESG impacts and commitments would be a deep warts-and-all analysis of practices, with an honest engaging and assessing of underlying impacts across the ESG spectrum, rather than just relying on potentially spurious or misleading ratings.

One of the easiest ways to spot greenwashing is when you find companies won’t talk about the negatives involved in aspects of their business, only the positives. The reality is that measures such as the UN’s Social Development Goals only exist because there are a whole series of environmental and social deficits they were designed to tackle.

If you are open and honest about commitment to responsible investment you have to be prepared to talk about the negatives of your business. It is only by being honest and open about these downsides that you can tackle them and transition to a more sustainable way of doing things.