GreenWorks

5 ways to separate real ESG leadership from greenwashing

How can people better identify greenwashing and help reinforce the growing sense of accountability for ESG standards? Look for these factors.

[Recently, in a landmark ruling against Royal Dutch Shell on May 26, a court in the Netherlands established that global climate policy was enforceable under Dutch national law. Shell must demonstrably reduce its emissions by 45% by 2030, or the company will be found in violation of human rights.

Interestingly, this ruling came after Shell had made public strides to commit to more environmentally friendly operations. As far back as 2018, Shell has been linking executive pay to reducing its carbon footprint. More recently, under pressure from stakeholders and activists, Shell announced plans to cut carbon emissions and hit net zero by 2050. So, while commitments have been made, and some actions have been taken, is this enough to say that Shell has been greenwashing?

The reality is that, when it comes to greenwashing, there are many shades of green. Like many other global companies, indeed, Shell has sustainability strategies and disclosures in the public domain. However, in this new era of stakeholder capitalism, companies can’t just talk the talk, they must walk the walk on sustainability. In this light, what could be penalized here is the lack of clarity in disclosures, and lack of urgency in setting specific timelines to enforce the actions that were promised. So the Dutch court ruling demonstrated that just saying that you’re on the journey to do better is no longer cutting it—and the public has played a growing role in upholding these standards.

PROBING FOR GREENWASHING: A SHIFT IN PUBLIC CONSCIOUSNESS

Prior to the Shell case, the world may have known about greenwashing, but didn’t care enough to fix it. Why now, in 2021, does greenwashing exist?

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In the past year, we’ve seen massive embrace of ESG (environmental, social, and governance) across the world. Regulators tightened the reins on ESG disclosure, large asset managers like BlackRock went public with ESG commitments, and maybe, most importantly, millennials (more naturally inclined to embrace “everything sustainability”) climbed the corporate ladder.

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The arrow is clearly pointed at corporate leadership to take ownership of ESG and truly embed material ESG risks and opportunities into their businesses. Accountability is at the top, whereas before ESG was more of an operational (read: box-ticking) exercise.

So how can more people, at the public level and beyond, better identify greenwashing and help reinforce this growing sense of accountability for ESG standards?

IDENTIFY GREENWASHING FROM TRUE LEADERSHIP

There are several hallmarks of companies that are genuine about their ESG efforts, when looking to separate greenwashing from impactful action:

  • ESG is strategic: Sustainability is made a priority from the top down, with boards and C-suite accountable for material ESG risks and opportunities.
  • ESG is integrated: It sits in strategy, risk, reporting and board oversight—and the effectiveness of these processes relies on business leaders adopting a data-driven and digitally-enabled approach to get a complete overview of emerging risks and opportunities.
  • ESG is cash rich: Budget is not assigned to marketing, but is assigned to activities that improve the business model.
  • ESG is included in audited financial reporting: The company has processes to determine material ESG risks and opportunities and includes this in its financial statements.
  • ESG is made specific: Companies explain which issues matter most and why—and where they sit in the value chain.

RECKONING WITH GREENWASHING WILL LOOK DIFFERENT

The Dutch court in the Shell case was a first, but it will not be the last time we’ll see lawmakers uphold global policies and hold corporations truly accountable for their actions. Maybe most notably, this year the U.S. Securities and Exchange Commission (SEC) clarified what climate-related risks are and how they’re affecting businesses and investors. The SEC also created a climate and ESG task force to proactively identify ESG-related misconduct and now has the authority to seek legal recourse if companies mislabel ESG funds and fail to improve their disclosures.

Public and private regulators will continue to push for corporate leadership, but lawmakers are not the only group responsible for keeping greenwashing at bay. There are other groups that can help put greenwashing in the past:

  • The public: With public disclosures being scrutinized, companies will have to get their story and strategy straight. There is no divide between the corporate premises and the consumer—social media enables direct engagement. Many companies also seek direct stakeholder feedback on their ESG performance through their reporting processes. Any individual with an interest in this should engage.
  • The media: With ESG being a hot topic across global media channels, companies will treat it as a center-stage topic. New technologies scan corporate communications for inconsistencies and uncover who’s making public commitments and who’s silent. When it comes to ESG, companies should realize that if they do not have a clear and consistent story on ESG, the media as well as the court of public opinion will write it for them. And companies are unlikely to be very happy with that version.
  • Investors: Investors are reallocating capital to future-proof businesses. Investors can make their wallets talk in various ways, from light-touch options like divestment through exclusion to direct engagement with companies on specific themes of interest. An area that seems most underdeveloped is the “ESG integration” opportunity. Investors could use the aforementioned technological capabilities to understand which companies are walking the walk or only talking the talk.

A lot of the external discussion in the past year has been about “investor greenwashing,” which is a separate problem. But, ultimately, it always starts with the quality of information produced by the companies, the issuers. If that is bad from the start, then investors don’t stand a chance to “get this right.”