‘Greenwashing’ risks and the path towards real progress
At a recent Swiss Re webinar, experts weighed in on the challenges to measuring environmental and sustainability performance, and pointed the way for investors, insurers and businesses to identify and resolve systemic risks that hinder genuine results.
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The world is making a concerted move towards reaching the goals set out in the Paris Climate Agreement. Recent years have seen a massive increase in regulatory, corporate and investment activities around climate change, environmental, social and corporate governance (ESG), and sustainability. Investment funds are flowing into green initiatives, with global ESG assets expected to surpass US$53 trillion by 2025. In Asia Pacific, 2020 was a record year for ESG investments, with the market set to grow further.
Yet the troubling truth is that not all these positive signals reflect real action. ‘Greenwashing’, or ‘climate washing’, has emerged as some businesses attempt to mis-represent or rebrand neutral or even unsustainable practices or investments as ‘green’, to tap into the current zeitgeist. One recent screening exercise by the EU, for example, found that 42% of websites selling consumer products were likely making misleading or fabricated claims about the eco-friendliness of the goods on offer.
Although there might be immediate gains from being perceived as a sustainable corporation, greenwashing presents multiple long-term risks for both businesses and society. At a recent Swiss Re webinar, experts shared insights on how to tackle this emerging challenge.
The real costs of greenwashing
“Our stakeholders trust that we do what we say to the public, and if it turns out that there is nothing concrete following those words, the trust is gone and it's really hard to reestablish,” said Dr. Mischa Repmann, Senior Sustainability Professional, Swiss Re.
“Trust pertains a lot to reputation, and besides reputation, another key risk is the delay in action,” agreed Dr. Kim Schumacher, Lecturer in Sustainable Finance and ESG, Tokyo Institute of Technology. "Greenwashing leads us to think that something is happening while nothing is happening."
“This then prevents necessary investments and innovation because we think we already achieved something that in fact only exists on paper.”
These delays can reduce a company’s resilience and competitiveness as its peers actively pursuing real sustainable innovations get a head start and win significant market share. “That risk is not only at the corporate level, but also at the sovereign level,” noted Dr. Schumacher.
On the other hand, companies that favour transparency and disclosure are also concerned that their honesty might cost them, as they inadvertently reveal operational advantages such as aspects of their business model and revenue streams.
However, when both risks are weighed, there is a higher cost associated with non-disclosure. “The current perception is that those who do not disclose either have something to hide or have not done a proper internal risk assessment,” noted Dr. Schumacher.
While adhering to Task Force on Climate-related Financial Disclosures (TCFD) is voluntary, experts said it remains in organisations’ best interests to be transparent in their reporting, as they will come away with a realistic assessment of both risks and opportunities.
At the same time, positioning the disclosures in the correct context is critical. Shortfalls in this regard can scare away investors, and make downstream funding activities like raising capital and issuing debt more expensive and difficult.
“The problem with that risk is a structural issue created by the investment community,” noted Jan van der Schalk, ESG Investment Specialist, Platinum Asset Management.
The increased adoption of wind turbines is one example. A wind turbine consumes about 4.7 tonnes of copper, but copper mining is a highly greenhouse gas-emitting activity. As ESG funds turn away from carbon-emitting endeavours, including copper mining, the world risks running into a shortage of wind turbines within the next 10 years.
“We have this choice, as investors, to invest in copper because that will mean that we can continue to have wind turbines in future,” van der Schalk explained. “The danger is if you say the wrong things to some investors, their instant response is to disengage or divest rather than to find a way of aiding where we need to get to.”
It is then imperative to differentiate companies and assets that are greenwashing from those that are in transition, or ultimately, if not directly, contributing to a more sustainable future.
Differentiating the fakes from the real deal
Webinar panellists zeroed in on several methods to assess if sustainability-related initiatives are beneficial or carried out with deceptive intent.
For example, an ESG or corporate social responsibility report going through a third-party audit is a strong sign of reliability. Board oversight is another important factor that can be deduced from the ESG parameters built into executive remuneration packages.
In general, experts agreed it is far more effective to assess the overall intent of a company by looking at its track record than to try to scrutinise individual activities for signs of greenwashing.
“It is always about asking if the company is giving itself the tools, such as setting an internal carbon price, to achieve what they’re announcing, or whether they’re just keeping up with their competitors’ announcements but allocating significantly less resources,” explained Dr. Schumacher. “That is a very good way of detecting genuine greenwashing.”
Data can be a powerful tool - but Dr. Schumacher also noted that high-profile scandals in the automotive industry have exposed the flaws in ESG ratings, and raised questions on the need for mandatory standards.
“There are concerns around our ability to truly evaluate the sustainability performance of financials and of corporates,” said Dr. Schumacher.
According to van der Schalk, reviewing the business and revenue-generating models of ESG rating agencies is also necessary, to ensure that companies are not given the opportunity to pay for a favourable rating.
It takes a village to eliminate greenwashing
For the investment community, there are two key areas to consider when evaluating sustainability performance and policies: goals, and timelines. It takes about 20-30 years for climate change efforts by companies to bear fruit, which doesn’t sync with the typical five-to-seven-year investment horizon.
“What we've got to look at as investment practitioners is when we expect to see results, and I suspect it may be longer than we think, explained van der Schalk. “What could look like greenwashing today may actually not be the case when we look back at it in three or five years.”
“It is more about taking a holistic approach towards appraising companies, rather than being fixated on specific measures or performance indicators like ratings statistics,” observed Dr. Alex Pui, Head of Nat Cat and Sustainability (APAC), Swiss Re Corporate Solutions, Swiss Re.
“What you don't want to do is to make up your mind based on unsatisfactory data and insights or supporting greenwashing by simply listening to a company's own story. It’s a dangerous game if you start to be too progressive based on those insights.”
Companies can do their part by reviewing their existing operations for immediate opportunities to reduce carbon emissions. Setting objectives that influence the balance sheet of each business unit can help motivate them to work towards the same corporate sustainability goals.
“Setting targets is the first step,” explained Dr. Repmann. “The second step is to add clear measures and implementation plans to achieve those targets, especially the long-term ones. There's a big danger of greenwashing if you set long-term targets that are hollow, with no implementation plans or actionable targets behind them.”
Insurers also have a major role to play by progressively raising the bar for their underwriting criteria, giving businesses time to transition, and being open about sustainability policies and expectations.
“The insurance industry is in a unique position, along with banks and other insurers in the financial industry, to motivate businesses to adopt transparent, sustainable practices and support them in their green transition,” noted Dr. Pui.
Above all the event underlined the pressing need for transparency and dialogue on all sides - “to disclose (and) to be open on the topic of ESG and sustainability, to avoid facing even bigger risks down the line,” as Rake put it.