Greenwashing, Reputational Impact and Where ESG Will Go Now
Lawrence Dore, a partner at DRD, discusses the ways in which ESG might develop in an atmosphere of increasingly rigorous monitoring.
The ESG ripples, which began with CSR in the 1990/2000s, have reached near-tsunami level driven by the simultaneous rise of ESG funds, consumer awareness, mobile and vocal workforces and increasing regulation. The arrival of COP26 in Glasgow last year led to global corporates scrambling to find an ESG announcement as their CEOs took to the podium. Largely, this movement has been a force for good, addressing some of the most profound challenges the planet and society faces and genuinely encouraging (and potentially forcing) companies to examine how they do business and what their impact is.
The opportunities and challenges of ESG
To support companies on this journey a classic stick and carrot approach exists: the carrot(s) range from increased consumer support for companies who are saying (and hopefully doing) the right things, increased employee retention (even more critical in today's hot labour market) and enhanced access to capital as investors seek to align their customers' desires to invest responsibly in asset allocation towards 'green' businesses. The ESG movement has also moved the narrative on: doing good things box-ticking ESG is not just the right thing to do from a moral/environmental/social perspective, but it is good business. Businesses with ESG built into decision-making are de-risking anticipating future challenges and future-proofing against environmental, regulatory and social change. Such businesses also demonstrate strong, long-sighted management and will, the argument goes, have strong governance. Again, largely, this is all for the good.
Concerns are real and alarm bells are ringing. And rightly so.
But beneath the headlines the past year or so has seen a sub-narrative emerge greenwashing, fake claims, data that cannot be trusted with the likes of Oatly, H&M coming under scrutiny and even derision over Hellmans mayonnaise being given a mission (classic Terry Smith!). Whether the pendulum has begun to swing back is unclear, but concerns are real and alarm bells are ringing. And rightly so.
The growth of ESG monitoring and claims of greenwashing tested before the courts
Companies have scrambled to meet demand for ESG credentials but concerns now abound that information has been pushed out with proper due diligence and care. And stakeholders are alarmed. The regulators have swiftly taken action. The EU taxonomy has provided a push EU companies with more than 500 employees are required to disclose both their transition away from carbon-emitting energy sources and, for those who sell financial products, disclose the impact of their investment on sustainable products. In the UK the Competition and Markets Authority (CMA) published its Green Claims Code in September 2021, meaning that any company that fails to abide by the code can be brought to court and, if found guilty, be required to pay redress to consumers. Fast fashion is now in the CMA's sights with a review announced in early 2022 with a particular focus on claims made in store and on labelling. The Financial Conduct Authority (FCA), meanwhile, has issued Sustainability Disclosure Requirements, diversity disclosure requirements and principles for disclosure of ESG in sustainable investment funds. The Advertising Standards Authority (ASA) has also sharpened its teeth announcing a series of research initiatives and enquiries into waste/recycling, meat-based and dairy foods, the electric vehicle market and heating. In each case claims of sustainability will be scrutinised. The implication is clear where claims of sustainability or some other ESG alignment is made, evidence will now be required. Similar initiatives are under way globally: the Financial Stability Board's Task Force on Climate Related Financial Disclosures, SEC guidance on climate change disclosure and the Federal Trade Commission's Green Guides all show a desire amongst regulators to bring order to reporting, disclosure and marketing claims.
The warning is clear: greenwashing will result in legal action.
It has not taken long for claims to reach the courts with claims or actions focussing on each element of the E, S and G. Uber has faced two actions from the App Drivers & Couriers Union, firstly being forced to reclassify its drivers as workers, bring substantial employment rights, and more recently in April 2022 being forced to introduce a sharia-compliant pension scheme. In March 2022, Client Earth brought an action claiming that directors of Shell are personally liable under the UK Companies Act for failing to manage Shell's climate plans. This action, which argues that Shell's energy transition policy is not a long-term plan to achieve net zero, relies on the landmark ruling against Shell in Holland following a claim by a group of Dutch NGOs and 17,000 claimants which resulted, in May 2021, in the Hague District Court ordering Shell to cut emissions by 45%. Finally, the G was brought into focus by Aviva's January 2021 letter, sent by the CEO Mark Versey, warning 1,500 companies that Aviva would vote to remove directors who did not act with urgency to address ESG issues. The warning is clear: greenwashing will result in legal action.
What the future might hold for ESG: less exciting, more effective
So where does this leave companies and those responsible for driving the ESG agenda internally? Firstly the drivers for change are unlikely to go away, with stakeholder activism and millennials changing the ESG landscape even if short-term political pressure around issues such as energy supply (coal usage is back) and food shortages (multi-packs are safe thanks to Boris). Climate change is accelerating and consumers, employees, staff and regulators are all demanding action. Greater clarity and regulation, whilst creating reporting and resourcing issues, will also help provide a clearer roadmap around what must be reported and when. ESG reporting will, for better or worse, become more onerous and perhaps the growth of compliance and risk management sign-posts the way. Good policies won't be able to sit on a shelf, but will need to be measured and reviewed. Annual reporting will drive the need for consistent data capturing and a compliance mindset will be required to evaluate the quality and veracity of information provided to third parties. Labelling, websites and marketing activities will need to be legalled, perhaps sacrificing some speed and creativity but ultimately de-risking the corporation. Sound familiar?
Everyone accepts that mistakes can happen, but they are less forgiving of systemic problems, and less forgiving still of cover-ups.
Albeit it is impossible to anticipate and mitigate against every risk, it is possible to make sure that there are processes and rigour in place. Everyone accepts that mistakes can happen, but they are less forgiving of systemic problems, and less forgiving still of cover-ups. ESG is also a communications exercise: you have to talk the talk, not just walk the walk. People want to see the data and interrogate it for themselves. That being said, as ESG grows up, so it needs to come back into the corporate centre, no longer the exciting new initiative but a core business discipline subject to the same rigour and analysis as all other elements of a well-managed corporate entity. Perhaps less exciting, but the good news is that ESG will one day disappear as a discipline and become part of good management. So ESG's extinction will show it has finally come of age.