Jenna Bunnell
Published 05/14/2024
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Your company’s commitment to being environmentally friendly and ethical across the board is incredibly important to your investors and stakeholders. It could be the difference between winning an investment and losing it. However, investors are increasingly looking for ESG greenwashing.
Greenwashing is a trap many companies fall into, and accusations of it fill social media. It can be as small as placing too much emphasis on one eco-friendly practice while downplaying the challenges you’re facing. Or it can be as big as making false claims about your supply chains or carbon emissions.
This article explains how you can spot greenwashing and how to ensure your corporate reports are greenwashing-free.
What is ESG greenwashing?
ESG greenwashing is when a business exaggerates or even lies about its commitment to environmental, social, and governance (ESG) standards. Companies may do this to appear more sustainable and socially responsible than they are.
Perhaps you’re presenting a corporate report to potential investors or thinking through ways your enterprise collaboration can be greener and more responsible. Either way, avoiding greenwashing is essential.
What is ESG?
ESG stands for ‘environmental, social, and governance.’ When deciding whether to invest or continue investing, investors use it to assess any non-financial risks a company might pose.
- Environmental (E). How environmentally friendly is the company? Most investors and fund managers will wish to see how a company affects the natural world and its resources. They might consider:
- Your carbon footprint. The amount of greenhouse gasses or carbon a company’s practices emit.
- Energy efficiency. How efficiently does a company use energy, and does it have any commitments to green or renewable energy?
- Waste management. How the business disposes of waste. Does it recycle or contribute to pollution?
- Biodiversity impact. What effect do the company’s practices have on ecosystems, and what’s its overall environmental impact?
- Social (S). Is the company socially responsible? Investors might look at how a company deals with its employees and vendors, as well as customers and broader social issues, such as:
- Labor practices. This covers employee working conditions and wages, as well as labor laws.
- Diversity and inclusion. What does the business’s commitment to diversity and inclusion look like? How does it promote diversity, and does its workforce represent different demographics?
- Human rights. Are basic human rights upheld at this company and throughout its supply chain?
- Community impact. How does this company engage with the local community? Does it harm or help them?
- Governance (G). Thinking big picture now, does the company’s governance work to ensure it’s ethical and transparent in all its activities? Can its leaders be held accountable? Investors will consider:
- Its board structure. Investors might look at the composition of the company’s board of directors.
- Anti-corruption policies. What policies and procedures does the business have in place to prevent and punish corruption?
- Compensation. How directors and executives are paid and whether this is transparent and fair.
What is greenwashing?
The term ‘greenwashing’ combines the words ‘green’, referring to something environmentally friendly, and ‘washing’, referring to when something is covered up or altered to appear other than it is. Investors wishing to make sustainable investments may be duped by greenwashing in reports.
Greenwashing is a common practice in a range of industries, though it’s become especially prevalent in fashion and food.
How to identify ESG greenwashing
So, how do you know greenwashing when you see it? It’s easy to get swept away by the grandiose claims of companies celebrating their eco-friendly practices or diversity programs.
However, whether you’re an ecommerce brand or a tech company providing a business phone app, these key indicators will help you spot ESG greenwashing from a mile away.
Vague and generic language
A classic way for a company to greenwash a corporate report is to use vague or generic language. A report with lots of generalized terms and without essential detail is an immediate red flag, as real ESG commitments should be clear and quantifiable.
Example: A retail company says in its corporate report that it’s “committed to sustainability” and makes big environmental claims, but there are no concrete plans or targets for reducing its emissions.
No third-party verification
Third-party audits and certificates are often used to verify a company’s genuine ESG practices. These audits are independent, and if a report is missing third-party input, you should be suspicious.
Example: A clothing brand promises that all its products are ethically produced, yet it can’t provide any certifications from independent organizations to confirm fair practices in its supply chains.
Inconsistent data
Typically, greenwashers like to cherry-pick data. This means showing off positive stats while concealing any information that might paint them in a less favorable light. Reports should thus be scrutinized for inconsistencies and discrepancies, as these might suggest negative data is being withheld.
Example: Due to its cloud data warehouse migration and other digital innovations, a tech company claims a 30% reduction in greenhouse gas emissions in the past year. However, on closer examination of the report, it’s discovered this is due to outsourcing energy-intensive manufacturing to a third party.
Too much emphasis on the positive
A corporate report will naturally highlight a company’s strengths—but there is such a thing as ‘too good to be true,’ whether you’re an energy firm or you’re developing a web app. A greenwashed report might place lots of emphasis on the positive work being done while barely mentioning (or even omitting) ESG challenges.
Example: A car manufacturer repeatedly highlights its recent investment in developing electric cars. In doing this, however, the company downplays the fact that most of its revenue still comes from high-emission vehicles.
No integration with core business strategies
Additionally, if the ESG commitments in a report feel separate and unrelated to a company’s core strategies and goals, investors should be concerned. Sustainability and social responsibility aren’t isolated initiatives; instead, they should be woven into all company practices.
Example: A financial company’s report highlights a charity donation given yearly and states that this is its primary ESG initiative. Despite this being a positive plan, it doesn’t reflect the company’s core activities, which may not be ethical.
How to avoid ESG greenwashing in your corporate reports
1. Embrace existing ESG frameworks
There are plenty of established ESG frameworks that you can use to help with your ESG reporting. Frameworks you should familiarize yourself with and choose from include:
- The Global Reporting Initiative (GRI). This is a comprehensive set of guidelines for reporting on ESG performance.
- The Sustainability Accounting Standards Board (SASB). These guidelines focus on how ESG and financial reporting intersect, helping companies understand the material impact of ESG practices.
- The Task Force on Climate-related Financial Disclosures (TCFD). This framework helps companies assess and disclose any climate-related financial risks.
- The Carbon Disclosure Project (CDP). The CDP collects data from companies to produce annual reports that help both companies and investors assess how carbon-friendly a business is.
- The UN Global Compact (UNGC). This voluntary initiative encourages companies to commit to 10 principles covering ESG issues and offers a framework for them to integrate these principles into their strategies.
2. Conduct a self-assessment
You also need to assess your company rigorously and honestly. This evaluation should cover your ESG performance over time.
With this assessment, you can identify areas to focus on moving forward, as well as show measurable improvements in your corporate report. You should make clear any material or digital challenges your company may be facing in relation to ESG.
3. Set clear and measurable goals
Just as you set measurable goals for your overall business plan, so too should there be goals for your ESG commitments.
Your corporate report should have achievable and transparent targets. Make sure you include key performance indicators (KPIs) too.
4. Seek independent validation
A third-party audit or certificate can considerably boost your trustworthiness as a proactive and responsible organization. This will help avoid the risk of greenwashing since your efforts are validated by an external body.
Look for common certifications in your industry, have the necessary audits carried out, and clearly show these validations in your report.
5. Cover all three pillars—and integrate
Your corporate report should cover all three pillars of ESG—environment, social, and governance. Give each pillar equal weight, and ensure your plans across all three are well-integrated.
Be sure to address the material issues associated with each platform. Identify any obstacles or problems you may encounter and address all possible risks. This will show investors that you’ve considered the full picture.
Your entire ESG report should be integrated with your overall business plan and strategies. Both sides of it should reference each other to show a commitment to ESG beyond empty gestures. Everything from your sales engagement to your corporate culture should have these principles in mind.
6. Stay Informed
One of the best ways to avoid ESG greenwashing is to stay current with industry standards and sustainability practices. Also, keep an eye out for regulatory changes or reporting requirements.
Your corporate report should be accurate and relevant to today’s ESG standards. Each pillar of ESG is constantly evolving as standards are increasingly raised with each passing year. Stay up to date and informed and refer to recent trends and reports where possible.
Conclusion: Make ESG greenwashing a thing of the past
Your investors and customers wish to see that your business is ethical and eco-friendly. It may be tempting to exaggerate the efforts you’re making or conceal challenges, but this will only create more problems down the line.
Instead, prioritize transparency over all else. By letting your investors know that while you may not be perfect, you’re working toward improving the sustainability and inclusivity of your company, you can show them you’re proactive and avoid greenwashing altogether.
Disclaimer: The author is completely responsible for the content of this article. The opinions expressed are their own and do not represent IEEE’s position nor that of the Computer Society nor its Leadership.
