Jarrel De Matas - Understanding ESG and Tips for Avoiding Greenwashing

Understanding ESG and tips for avoiding Greenwashing

By Jarrel De Matas

Issues related to environmental, social, and governance (ESG) practices have rapidly grown in prominence since it was first introduced in 2005. As part of an overall drive toward corporate sustainability, ESG encapsulated three critical components of business operations. Almost two decades later, companies have increasingly woven ESG into their business strategy in response to investors prioritizing organizations and products that promote and support sustainability as well as comply with emerging regulations involving, but not limited to, climate change.

According to the PRI (Principles for Responsible Investment) – an investor initiative in partnership with UNEP (UN Environment Programme) Finance initiative and the UN Global Compact, when the term ESG entered the mainstream, there were 63 investment companies with US$6.5 trillion in assets under management (AUM). In 2021 the number of investment companies grew to 3,826 with a combined AUM of approximately US$125 trillion. The sharp rise in ESG investing reveals how integral sustainability is to the success of corporations.

Recently, the COVID-19 pandemic encouraged the latest trend of ESG investing. The various forms of market disruption and uncertainty that affected the

manufacturing, construction, and trade sectors amongst others, led investors to turn to ESG funds which carried the potential of being resilient against the pandemic’s impact at both the country and company level. As a result of this increasing turn toward ESG investment, organizations have experienced increasing pressure to be more transparent about how they promote, support, and manage environmental, social, and governance criteria. The pressure to disclose ESG-related initiatives is mostly driven by the understanding that investors, governments, regulators, and the wider society are demanding access to ESG information in order to invest.

The rise of sustainability reporting, however, is itself an issue due to the lack of standardization. Companies use different types of reports such as sales reports, sustainability reports, and annual reports to disclose their information. The inconsistency in reporting increases the likelihood of misleading and/or inadequate information. A 2022 survey by GaiaLens, a UK-based Financial Technology group providing data-driven and transparent ESG analytics, revealed that only 23 percent of asset owners were satisfied with the quality of the ESG information they received.

The dissatisfaction with ESG disclosure stems from the potential of reports to either exaggerate or misrepresent the ‘green’ initiative of companies; a practice commonly referred to as ‘greenwashing’. Alongside the increasing profitability of ESG investment is the increasing rise in greenwashing. Last year, The Economist found that on average, each of the world’s 20 biggest ESG funds holds investments in 17 fossil-fuel producers. Six of them have invested in the biggest oil firm in the United States of America. This practice of greenwashing negatively impacts future investments as well as, more importantly, the future of the environment. Greenwashing of ESG disclosure negates the founding principle of ESG which is to create and maintain corporate social responsibility when dealing with environmental matters. Beyond the recommendations for companies to avoid ESG greenwashing by either providing more details of how their ESG initiatives are protecting and/or restoring the natural environment, vaguely stating the necessity of ESG programmes without implementation, and setting a scope for what ESG criteria will be the focus on the corporate strategy, two specific measures that can be taken are –creating a standardized form of ESG disclosure, and integrating ESG criteria as part of a long-term strategy.

Creating a standard for disclosure

The various, non-standardized ways of ESG reporting create the potential for greenwashing. Therefore, there needs to be a standard model for ESG reporting along with a generally and globally accepted framework to measure the quality and consistency of ESG reporting criteria.

Before reaching a globally accepted framework, local standards for ESG reporting need to exist beginning with the internal priorities set by organizations. If the 2022 PwC Corporate Governance Survey is anything to go by, ESG issues, despite being recognized as important, still rank among the lowest of priorities by board members. According to the survey, 60% of board directors indicated that their board does not have a defined process for ESG oversight. Even more striking is that 45% revealed that their company does not provide ESG reporting.

To arrive at a national standard for ESG reporting, organizations can focus on a common denominator in corporate social responsibility to avoid becoming stretched thin or superficially resorting to box-ticking a random set of ESG criteria. One common denominator applicable to all organizations regardless of size, location, purpose, or structure is ISO 37000, the international benchmark for good governance. ISO 37000 provides guidance to assist all stakeholders involved in an organization with clarifying purpose and values, defining roles and responsibilities, and outlining accountability and reporting systems. At present, various organizations adhere to ISO standards specific to their operations.

The 2021 ESG report by Digicel Group, the international mobile phone network and home entertainment provider operating in the Caribbean and Central America,

states that 22 of its business continuity plans were reviewed using ISO 22301: the international standard for implementing and maintaining effective business continuity plans, systems, and processes. Additionally, the company received ISO 27001 accreditation in 2021, the gold standard for information security management systems.

Methanex, the world’s largest producer and supplier of methanol to international markets including Trinidad and Tobago, has committed to international standards in quality management (ISO 9001) and environmental management (ISO 14001). The guidance set out in each ISO standard ensures that specific forms of ESG-related greenwashing do not occur.

For a generalized benchmark of ESG disclosure, companies must look to ISO 37000 which, given its emphasis on building an environment of trust, accountability, and transparency, lays the foundation for the long-term success of organizations and ensures their contribution to the protection of social and environmental systems.

Integrating ESG for the long-haul

To avoid greenwashing, an organization must integrate its ESG initiatives into all of its operations, not a select few, and as part of a long-term strategy, not a temporary quick fix. The common practice in medium and large organizations to have a person or team responsible for ESG sustainability creates the potential for a disconnect between the company’s core operations and its corporate social responsibility. This occurs due to the person or team either being isolated from the rest of the organization or having a limited budget. As a result, the ESG initiatives might lack the ability to provide benefits to the organization.

Instead of a designated person or team placed in charge of ensuring the organization adheres to ESG values, there should be involvement by senior executives and the CEO in the creation of strategic ESG decisions as well as by individuals further down in the organizational hierarchy who have a clear direction of the ESG culture embedded within the organization. The combination of a top-down approach whereby senior management transmits the ESG values and initiatives and a bottomup understanding of the organization’s ESG, goals will ensure that issues of sustainability will be shared at different seniority and organizational levels. The full embedding of ESG values within the entire governance structure of the organization can reduce the potential for greenwashing since the whole company, not just an individual or select group, will be involved in the ESG strategy.

Additionally, to maintain value creation and simultaneously avoid greenwashing, organizations must develop ESG initiatives that are part of a longterm strategy that is aligned with the company’s vision, mission, and corporate responsibility. For example, Angostura Limited, the only rum distillery in Trinidad and Tobago, has incorporated its commitment to corporate social responsibility into the company’s vision to ‘proudly grow for the betterment of the environment and the people of Trinidad and Tobago’. This vision has materialized in the company’s 2022 cocoa bitters ‘Sustainable Future’ programme which is designed to ensure a sustainable future for small-scale organic cocoa farmers in Trinidad and Tobago. The programme focuses on farmer education to support the survival of the Trinitario cocoa variety as well as promotes the quality of Trinitario cocoa internationally.

Conclusion

ESG investment is surging. As matters involving the environment, social responsibility, and good governance increasingly become part of the business strategy for organisations of any size or type with their own specific purpose and structure, there will be increasing scrutiny of how well these organisations not only adhere to but also promote ESG principles. Because of the investment opportunities associated with contributing to a sustainable future, the pressure on organisations to report on ESG programmes could inadvertently lead to companies exaggerating or misrepresenting their sustainable footprint. This practice of greenwashing ultimately causes more harm to corporate social responsibility.

To avoid instances of greenwashing, organisations can first agree upon and then commit to a standard form of ESG disclosure. ISO 37000, the international benchmark for good governance principles is a good place to start because whatever the industry, governance is integral to corporate sustainability. Another way in which organisations can avoid greenwashing is to integrate ESG into their long-term strategy. Although the term ESG might now be considered a buzzword, the intention of creating a sustainable future will only increase in significance as the climate crisis worsens. Therefore, a company that makes ESG initiatives part of its mission, vision, and purpose will ensure that ESG is not just another box to tick.

While a standardized, long-term ESG strategy may seem daunting, it is imperative to the competitiveness, reputation, and longevity of a company that concerted efforts to avoid greenwashing are exercised. Added to this is the positive impact that a strong CSR approach can have on protecting the natural environment. Everyone and everything stand to benefit when organisations steer clear of greenwashing.

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