Do Companies Want to Be Sustainable?

Before we get into greenwashing, let’s look at what corporate sustainability is. Most companies follow environmental, social, and governance (ESG) principles.

Environmental = Factors like carbon emissions, deforestation, waste management or green energy initiatives help determine a corporation’s impact on the environment. 

Social = commitment to diversity, fair labor standards or sexual harassment policies.  Social components also include how a company facilitates change outside its walls and works for good in the greater world around them. 

Governance = political contributions, diversity of board members and fairness of executive pay. 

ESG research firms calculate scores on a 100-point scale based on all of the above criteria to help investors make an impact with their dollars. 

Myth: Companies Act out of Benevolence for ESG goals

We may have visions that executives sit around the boardroom thinking of ways we can have a more healthy planet and society. In reality, companies appear to be motivated to meet ESG standards due to fear versus the goodness of their hearts.

In the UK, a survey of 600 senior business leaders found 62% are worried about being sued if they don’t meet their ESG goals. Many were concerned about meeting renewable energy goals and closing the pay gap between the genders and low versus high income earners.

In Canada about three-quarters (74 percent) of employers admit it’s a challenge to put these mandates into action, and 53 per cent are unprepared to manage ESG regulatory changes, reports Enterprise Ireland.

Four in 10 lack the tech needed to deliver and measure ESG initiatives, and only one-third have a dedicated ESG role or department.

Myth: A Good ESG Rating Reflects Environmental Benefits

Often the actions taken by a company to meet ESG goals have limited benefits. In a study conducted by the University of Columbia and the London School of Economics, they found that companies included within an ESG portfolio actually had worse compliance records for both labor and environmental regulations than those that were not included. Sadly I had this experience when I invested in an ESG portfolio that under performed the S&P by more than half.

For example, in 2019, McDonald’s was responsible for producing an estimated 54 million tons of CO2 in emissions. However, in 2019, its ESG rating was upgraded after analysts determined that climate change did not pose a significant risk to the company’s profits.

Myth: ESG Funds are Green and Good Investments

According to PwC’s Global Investor Survey 2023 investors are increasingly concerned about corporate greenwashing, with 94% reporting that they believe corporate reporting on sustainability performance contains unsupported claims.

This concern is not unfounded. One long-held secret of ESG funds is that to be competitive, they are packed with more profitable investments that are not green.

A 2022 study by ESG Book found that ESG funds on average produced 14% higher GHG emissions than traditional funds. The same study found ESG funds investing in mining and fossil fuels, including Shell, Exxon Mobile, and BHP Group.

The SEC recently fined Deutsche Bank’s investment arm, DWS, $19 million for “materially misleading statements” relating to greenwashing in ESG funds.

Holding Companies Accountable

Greenwashing for marketing purposes, while misleading, rarely meets the standard of a regulatory violation. However, when greenwashing is directed at investors it could violate financial regulations and fall under the authority of the SEC. At the same time only 25 percent of companies are ready to comply with ESG regulations that require outside audits.

Recently The Pathways Alliance, a group of Canada's biggest oil sands producers, has removed all content about environmental goals from its website and social media pages, citing "significant uncertainty" over the federal government's anti-greenwashing legislation.

Many investors are looking to emerging laws on sustainability reporting to address their greenwashing concerns, with 57% saying companies meeting regulations and standards including CSRD, the SEC climate disclosure rule or ISSB standards would meet their information needs for decision-making to a large or very large extent.

The European Union was the first, with the European Sustainability Reporting Standards (ESRS) approved in July and set to go into effect January 1. The ESRS will require publicly traded and large privately held companies to report greenhouse gas emissions, actions taken by the entity to reduce GHG emissions, and other green policies. Eventually it will expand to small and medium-sized enterprises. While reporting will be mandatory, no environmentally friendly action is required.

In the U.S., the Securities and Exchange Commission recently announced a rule requiring environmental, social, and governance funds to be 80% aligned with the fund’s stated goals.

Companies See Positive ROI from ESG

The majority of U.S. CEOs expect to see significant returns from their company’s sustainability investments within three to five years. At the same time, larger companies, with revenues greater than $10 billion are well ahead of their smaller peers with less than $5 billion in meeting ESG goals.

Financial services sectors were the most advanced, with Insurance and Banking each scoring over 52, while Life Sciences & Healthcare and Infrastructure scored lowest at 44.3 and 43.2 respectively.

Let’s hope new policies and interest in ESG profits from CEOs will drive us farther from greenwashing and to meaningful outcomes for people and the planet.