Organisations have been warned: greenwashing their sustainability credentials will jeopardise the interests of shareholders and increase costs to their business.
The warning comes from Emma Howard Boyd, chair of the Environment Agency and interim chair of the Green Finance Institute, in a speech to be given at the first annual forum of the UK Centre for Greening Finance & Investment today.
Howard Boyd will tell the gathering that investor interest in ESG (environmental, social and governance) issues is causing greater “scrutiny” of companies’ environmental performance and an incentive for innovation.
But she warns that the interest is “exploitable”. “If we fail to identify and address greenwashing, we allow ourselves false confidence that we are already addressing the causes and treating the symptoms of the climate crisis.
“Greenwashing makes it more likely that we won’t realise this deception until it is too late,” she says. “Companies that believe their own greenwash are embedding liability, storing up risk for their investors.”
She adds: “The more businesses are transparent about their plans to transition to net zero and prepare for climate shocks, the easier it is to benchmark best practice, set standards and celebrate the companies that really are delivering on their commitments.”
Green or bust
Talk of greenwashing has been around for as long as there has been discussion of companies reducing their impact on the environment. But the issue became headline news at the beginning of June when German police officers raided the headquarters of the country’s top asset manager DWS Group, prompting the resignation of chief executive Asoka Wöhrman.
Howard Boyd is not the first to warn of greenwashing. Last year, Nada and Andrew Kakabadse, academics at Henley Business School, wrote for Board Agenda that of the huge volume of cash available for investment in UK markets, very little is “funnelled towards ESG initiatives”.
“In effect, the investment market is treating ESG as greenwash—a term leftover from the era of corporate social responsibility,” they wrote. “Very few funds are paying attention to ESG and the notion that shareholder pressure is making a significant impact is quite simply false.”
The dangers of inflation
Last month, researchers at the University of Maastricht wrote that companies may “inflate” their ESG performance for fear of investors divesting from their stock. The writers, Dennis Bams and Bram van der Kroft, said the situation may be worse. Since ESG ratings are based on “future sustainability performance”, ratings fail to capture “realised sustainable performance”. Ratings therefore examine promises, not actual achievements.
It is inevitable that as efforts to battle climate change intensify, attention will fall on the claims made by organisations and whether they are true. As companies increasingly report using new standards—either TCFD, new European rules or the evolving reporting rule from the International Sustainability Standards Board—then disclosures and statements, and even advertising, will come under much greater scrutiny for greenwashing. It is unlikely that the DWS raid will be the last.