Multiple companies have recently been exposed for lying about environmental commitments – but how can we combat this going forwards?
In the last 5 years, there has been a 71% rise in searches online for sustainable goods, according to the Economist Intelligence Unit. 66% of all respondents say that they consider sustainability when buying any product, according to a survey from McKinsey and Co. And according to a report by Nielsen, sustainably marketed products sell better than their normal counterparts.
Clearly, these reports show how recent trends in climate change have prompted consumers to consider the environmental, social and governance standards of the products they are buying. However, with this recent ESG push, many companies have come under scrutiny for misrepresenting how environmentally friendly their products really are.
Since environmental considerations increasingly crept more into all aspects of life, many high-profile scandals have rocked companies accused of ‘greenwashing’. ‘Greenwashing’ is defined as when marketing is used to persuade the public that a company’s business activities are much more environmentally friendly that they are. This poses obvious issues, with customers who intend to reduce their own carbon footprint unwillingly contributing to the climate problem. As everyone’s favourite climate warrior puts it:
“The biggest danger is not inaction. The real danger is when politicians and CEOs are making it look like real action is happening, when in fact almost nothing is being done, apart from clever accounting and creative PR.” – Greta Thunberg, COP25
Recent examples include German Asset manager DWS exaggerating its ESG credentials, newly IPOd Oatly share prices taking a tumble after greenwashing accusations, and many oil companies’ clean energy claims being disproven. Scandals like these are happening far too often – there needs to be an international collective effort to fight back against corporations misleading their customers.
So what has been done to combat this problem? At the most recent climate summit in Glasgow, a new ‘International Sustainability Standards Board’ was announced. The aim of this body is to establish a framework for regulators to use to set rules on companies’ and governments sustainability claims and reports. It has been compared to the environmental equivalent of financial accounting standards and gives a common language for comparing climate related performance. The new guidelines are to be announced later this year. The effectiveness of this new framework is subject to how widespread its uptake is, but the principle is certainly a step in the right direction.
Separately, the European Union is also drafting its own similar rules to try and address the issue. Whilst the ISSB rules will require companies to release information about their sustainability-related ventures that could affect their corporate value, the European Union rules will also involve companies reporting on their wider societal and environmental impacts – even if there is no direct link with the value of their business. Additionally, the rules developed by these European Authorities will be more widespread and will apply to most listed companies on the continent.
Despite seemingly being more proactive in implementing climate rules, the EU has been criticised over some details within their proposals. Controversially, they have labelled nuclear and some forms of natural gas power as ‘sustainable’ – something not all climate change experts agree with.
Outside of the EU, progress appears to be moving slower. US regulators have been slow off the mark to draft up any climate related rules, but under the new Biden administration, work has begun by the securities and exchange commission to update existing SEC disclosure requirements. Additionally, the world’s biggest polluter, China, has said that it intends to implement similar rules on its own companies in collaboration with the EU.
However, is it realistic to assume that the state sector will solve all these problems for us? Is there a role that the private sector can play in helping to better inform investors and customers about their business choices?
Non-profits such as B-Corp have taken it upon themselves to provide a way for businesses to prove to clients and customers that they are achieving desirable levels in all aspects of environmental, social, and corporate governance. Companies can approach B-Corp, and after a thorough investigation into their business, can potentially achieve a ‘B-Corp certification’ which verifies their ethical business practices. In the same way you may go to a Michelin guide restaurant to guarantee high standard food, this is a way of a third party verifying ethical business practices – and not just on an environmental front. Private companies such as these could be another way to combat false claims that many businesses make when it comes to ESG commitments.
Going forward, not only is it in the planet’s best interests for companies to deliver on environmental goals, but it is also increasingly in the best interests of the businesses themselves. Consumer attitude has dramatically shifted towards sustainable businesses. If corporations are exposed for not being as environmentally friendly as they say they are, they will suffer loss of customers to those that can prove they are doing all they can for the planet. Implementing frameworks or certifications gives businesses no place to hide, and can help contribute to further ESG progress.