Big business is eager to show its environmental and social credentials. But how can you tell if a firm is genuine — or merely greenwashing?
British cyclist Neah Evans sports a Shell plc logo on her jersey at a race near Paris, France, 16 October 2022. (AP Photo/Christophe Ena)
When oil-and-gas giant Shell agreed to sponsor the organization representing British bicycle racing, the deal set off a debate over “greenwashing” that highlights the challenges consumers and investors face in assessing the environmental credentials of big business.
The challenges affect consumers of products ranging from mobile phones to shampoo. They also affect investors worldwide, including workers with employer-sponsored retirement plans and citizens of countries with sovereign wealth funds.
Trillions of dollars are at stake over the environmental and social policies and governance practices — so-called “ESG” principles — of big companies. The issue boils down to one question: Can you know whether a company’s commitment is genuine or merely an attempt to polish a firm’s image with shallow publicity that shields undesirable activities, known as “greenwashing?”
“Greenwashing is a loaded phrase, but it means you lied,” said a lawyer who advises firms on implementing ESG policies. He spoke on condition of anonymity because he was not authorized to speak for his firm on the issue. “Basically you’re saying something that is not true,” he said.
The Shell-British Cycling controversy broke out in October when the organization that built UK cycle racing into a global powerhouse announced an eight-year partnership with Shell UK. Terms were undisclosed, but media reports put the annual value of the agreement at more than $1 million.
The calculation was clear. British Cycling has endured its own share of recent image problems. It needed a deep-pockets sponsor to replace global bank HSBC, which had dropped out early from its sponsorship. Shell wanted an association to highlight its stated “net-zero” goal of adding no more greenhouse gas emissions than was being taken out.
“Working together we can deliver real change for people right across the country,” Shell UK’s head David Bunch said. “The partnership reflects the shared ambitions of Shell UK and British Cycling to get to net zero in the UK as well as encouraging low and zero-carbon forms of transport such as cycling and electric vehicles.”
Environmentalists accuse Big Oil of greenwashing.
The backlash was quick.
“Big Oil are looking at sports as the next frontier for their brazen greenwash,” the Greenpeace environmental group said. “But their aim hasn’t changed — to distract from the inconvenient fact that the fossil fuel industry is making our planet uninhabitable.”
The accusation was echoed across social media, other environmental organizations and cycling commentators.
Even British cycling acknowledged the awkwardness. “We recognize the sensitivities of working with a company like Shell,” British Cycling performance director Stephen Park told Cycling Magazine. “We need to have commercial partners to help support what we do.… It’s been difficult over the past four years or so, and Covid has not helped.”
The attention to greenwashing comes amid the increasing power of the ESG movement and its impact on companies. Climate change and international efforts to contain it, as well as social concerns highlighted by the global racial-justice protests that followed the 2020 murder of George Floyd in the United States, have been major driving factors.
By last year’s COP26 United Nations climate change conference in Glasgow, 74 countries including the UK, China, the United States and Russia had committed to setting net-zero emissions targets. The COP27 conference in Egypt in November will be looking for countries to commit to reducing greenhouse gas emissions by 45% by 2030, with a goal of reaching a net-zero state by 2050.
On social justice issues, major companies including financial giants JPMorgan Chase & Co and Goldman Sachs have pledged billions of dollars to advance racial equity and vowed to pursue new hiring measures to advance diversity.
Investors, ranging from multibillion dollar investment funds and sovereign wealth funds to individuals managing their own nest eggs, are seeking to back such efforts. They want to steer their money to companies they consider environmentally and socially responsible.
The value of ESG-related investments overseen by asset managers is projected to grow to $34 trillion globally in 2026, from $18.4 trillion last year, the PwC consultancy reported in October.
Consumers and governments scrutinize corporate claims.
Consumers are watching closely. In a separate PwC survey in 2021, 80% of consumers in five major countries said they were more likely to buy from a company that “stands up for” environmental, social and/or governance policies.
With all the money involved, governments around the world are increasing scrutiny over how companies and investment companies are living up to their ESG claims.
The European Union last year mandated that asset managers disclose more about their investments’ impacts on environmental and social factors. The EU is preparing to require individual companies in the bloc to increase their reporting on “sustainability information” and ESG risks.
The U.S. Securities and Exchange Commission has proposed requiring companies to disclose their greenhouse gas emissions, as well as those of their suppliers, and report on the climate-related risks that their businesses face.
In Asia, the Monetary Authority of Singapore will from next year require that ESG-related investment funds disclose how well they have met their goals.
Authorities are cracking down on greenwashing.
The efforts reflect an international consensus on the need to set ESG standards for investing.
“Setting regulatory and supervisory expectations is … fundamental to addressing issues relating to risk mismanagement and greenwashing,” said Erik Thedéen, head of Sweden’s financial markets regulator and chair of a sustainability task force of the International Association of Securities Regulators.
“This trend from ESG being a voluntary consideration to a mandatory one is very much under way now,” said Alex Bernhardt, Global Head of Sustainability Research as BNP Paribas Asset Management.
Authorities are not waiting for new rules to start cracking down on greenwashing. German prosecutors raided offices of Deutsche Bank and its funds arm, DWS, in an investigation of a whistleblower’s allegations that DWS misled investors about green investments in its $900 billion portfolio. The head of DWS, who denied the allegations, agreed to give up his role.
U.S. authorities are also investigating Deutsche. What is more, they have fined Bank of New York Mellon over allegations it misrepresented its oversight of ESG investment funds, and they are reported to be investigating whether Goldman Sachs was meeting its marketing claims for some ESG funds.
Even H&M, the trendy, mass-market clothing retailer, is facing a class-action lawsuit filed this year in New York from consumers who accuse the company of greenwashing. Allegations include that it gave false data about how much water it uses to make clothes and misrepresented its ability to recycle old clothes for consumers.
The suit said that H&M “has misrepresented the nature of its products, at the expense of consumers who pay a price premium in the belief that they are buying truly sustainable and environmentally-friendly clothing.”
H&M later told the Dutch consumer regulator, which had also challenged the clothing maker, that its sustainability claims “should have been clearer and more complete” and promised to review such information on its website.
Right now, it’s up to consumers and investors not to be fooled.
Until standards are widely adopted and enforced, it will be up to individual consumers and investors to ensure they are not being fooled by greenwashing. That means following the data — How is the company spending its money, and what concrete steps is it taking to make good on its commitments?
When a company touts its ESG goals on its web site or in advertisements, the claims are increasingly seen as statements of material significance, subject to verification by regulators and lawsuits by aggrieved investors.
“This is the time to ask questions,” said the ESG lawyer. “Where did the company get those numbers? Is it independent? Is it self-reported? Most ESG numbers are self-reported.”
The Shell corporate website has an extensive section on its sustainability goals. They include “becoming a net-zero emissions energy business by 2050” and investing “around $2 billion” in low-carbon energy projects.
But that section is accompanied by a lengthy legal disclaimer clarifying that such statements are “forward-looking” and subject to any number of risks that could cause actual results to vary.
Nevertheless, such specific goals can be used as a scorecard for whether firms are following through on their public commitments and whether they are forthcoming when they fall short of targets.
Firms with sound ESG policies tend to perform well.
How the company is structured is another key indicator, the lawyer said. If responsibility for delivering on ESG commitments is housed with parts of the firm that handle oversight functions, such as legal, compliance and financial departments, it is a sign that those in charge of protecting the company will ensure ESG issues are be given proper attention.
Applying the follow-the-money approach on a large scale, Bernhardt at BNP Paribas said the firm has developed a data tool to analyze the revenue sources of 50,000 companies for how closely they align with the 17 “sustainable development goals” adopted by the UN in 2015. The goals set targets for issues such as clean energy, gender equality and elimination of hunger.
As ESG-based investing has grown over the last two decades, much research has shown that companies with sound ESG policies show strong financial performance, Berhnardt said. He predicted investors will increasingly focus on the real-world impact of companies’ ESG policies, beyond mere profits.
He cited examples of BNP Paribas promoting shareholder resolutions, some of them successful, on issues such as making energy companies disclose how much they spend on lobbying.
“One of the ways in public markets that you can really achieve a positive real-world outcome is to convince a company that you invest in or that you want to invest in, or that you may invest in the future, to change its practices,” Berhnardt said.
“If you have success with a large corporation, convincing them to adopt a low-carbon strategy or to adopt a more equitable strategy in their employment, these things can have a dual impact, on real-world outcomes as well as valuations.”
Three questions to consider:
- What is “greenwashing?”
- Why would an energy company sponsor a cycling team or event?
- What do you think is the best way to ensure companies’ ESG claims are legitimate?
Randall Mikkelsen has more than two decades reporting and editing political and economic stories for Reuters, including seven years covering the White House and postings in Stockholm and Philadelphia. He helped cover the 9/11 attacks in the United States, two U.S. presidential campaigns, a U.S. presidential impeachment, Guantanamo terrorism trials and the 2008 financial crisis.