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Karen Alonardo
Vice President of ESG Solutions, NAVEX
March 25, 2022

Rising CO2 emissions have harmed far-reaching corners of our global ecosystems due to inaction. Companies that have merely made surface-level changes to their environmental, social and governance (ESG) programs don’t just face the consequences that accompany each aspect of ESG programs, they also face potential business instability. For companies to have a financially material business strategy in the years to come, they need to take meaningful and measurable steps to deliver on their ESG commitments, while being cautious not to greenwash business objectives.

Not all businesses practice greenwashing—which involves deceptively persuading the public to think their products or policies are environmentally-friendly, when in reality they might not be. In fact, some businesses are already acting, adapting quickly to ESG practices and expectations, even without formal regulations and reporting standards in place. In fact, NAVEX’s 2021 ESG survey revealed that 88% of publicly traded companies in the U.S., the U.K., France and Germany already have ESG initiatives in place. However, saying a business has ESG plans and goals in place is far different than successfully executing on those plans. Gartner has studied this disconnect, identifying an ambition gap between the goals companies set for themselves and their ability to attain them, which can also lead to greenwashing.
Unfortunately, without formal ESG regulations and standards in place, greenwashing has become a more common practice today, with about 42% of claims being exaggerated, false or deceptive, according to the European Commission. On the surface, greenwashing may seem like the best near-term approach to appear forward-thinking, but in the long-term, it will have negative consequences on the business – both from a hiring and investment standpoint. By considering the following greenwashing consequences, businesses can better prepare for the mounting pressure when it comes to sustainability reporting and building ESG initiatives.

Impact on investor relations

ESG has captured the attention of investors for its environmental and financial value. According to the U.S. SIF Foundation’s 2020 biennial “Report on U.S. Sustainable and Impact Investing Trends,” ESG investments now account for one-third of total U.S. assets under management, and sustainable investing has increased 42% since 2018. Moreover, according to Gallup, 48% of U.S. investors are somewhat to very interested in ESG, creating a potential market of funds that companies should focus on leveraging.

Amid this swiftly growing interest and attention from the investment community, regulatory agencies are signaling that they will soon require businesses to report on their ESG efforts, creating further pressure for companies to prioritize ESG initiatives. This shift has manifested itself already as the European Union passed two significant ESG-related regulations: the Sustainability-Related Disclosure Regulation (SFDR) at the end of 2019 and the Taxonomy Regulation in 2020. And, will soon in the US as well as the SEC recently proposed its new disclosure rules. In response, organizations will be left to determine a way to track, catalog and report on their ESG goals to show stakeholders that their efforts are honest and actionable. This is where companies practicing greenwashing can get themselves into hot water—and some would say rightfully so. By regulating ESG reporting for external stakeholders, companies will be forced to make sustainability initiatives achievable, and more than a “check-the-box” activity or marketing exercise.

Businesses that can present quantitative ESG results will be the ones to get investor attention—and ultimately, funds.

Organizations that merely feign “green” campaigns will disillusion investors, especially when their “eco-friendly” promises fall through. Since companies with actionable and measurable ESG goals will appeal to more investors, those that strengthen their sustainability initiatives now will have a major competitive edge.

A limited pipeline of talent

In addition to boosting the bottom line, strong ESG initiatives also attract top talent. By attracting skilled workers interested in furthering ESG goals, companies can create a virtuous cycle of continuous improvement that further reinforces ESG initiatives and then continues to attract skilled staff. Put differently, companies that allocate energy and time to their sustainability goals are building a stronger “S” in their ESG. By making ESG an ongoing part of daily business operations, companies can help ensure they attract forward-thinking staff to build their brand and maintain a strong, socially aware culture.

Companies that don’t bake sustainability into their business values will miss out on a large pool of applicants as ESG is increasingly a top priority for talent – and the younger the talent, the more of a priority it is. For example, while Gen Z comprises 12% of the workforce—due in large part to their oldest members just being 24 years-old—half of Gen Zers say their personal ethics plays a significant role in where they choose to work, according to Deloitte. They tend to favor companies that have profound stances on ESG issues, signaling a forthcoming shift toward brands that share these same priorities.

Greenwashing is a business risk that can result in hiring challenges, stagnation in the company culture and lost competitive advantage. To this end, ESG should also be considered a core element of not just investor relations, but also of the employer brand.

Undoing the greenwashing

While the causes of greenwashing may be many-fold, the first step is to recognize the risks it poses to the business and its brand equity. By anchoring ESG programs to the risks they can eliminate, organizations can set goals that are meaningful and attainable, and address claims of greenwashing made against them, if any.

While many organizations set aggressive environmental goals without a concrete plan to achieve them, to prevent future greenwashing, boards and top executives need to prioritize transparency and actionability in their planning. This starts with the ability to report and track current ESG factors, whether negative or positive, and determine the next steps to improve these foundational metrics. Begin by benchmarking. Ascertain, for example, the company’s current Scope 1 and 2 emissions as defined by the Greenhouse Gas Protocol to manage emissions. Answer questions such as, ‘does the company source conflict minerals?’

To make meaningful and measurable improvements, visibility into the process is critical. With metrics in hand, teams can begin diving in to learn more about areas for improvement. For example, are most emissions coming from one location? Is it possible to work with the supply chain for more environmentally friendly outcomes? Find low hanging fruit and iterate for continuous improvement.

Lastly, by including the opinions of stakeholders and employees in ESG priorities, companies will be able to build a tailored and successful set of sustainability goals that benefit all parties involved.

With future regulations on the horizon, ESG must continue to be a top priority for business leaders looking to stay competitive and successful in their industries. Recognizing these risks of greenwashing can help push executives in the right direction, since financial and ESG success are inextricably linked.

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