When ESG Becomes Greenwashing

ESG (Environmental, Social, Governance) is booming! Reuter reports that ESG investment in the past two years worths over $1 trillion. Notice the word “investment,” which implies spending but not where and how that spending is governed or standardized. Companies are free to do any action they deem “ESG”—from donating to forest funds to reducing carbon emissions or even demanding suppliers to also adopt ESG. The plethora of routes a firm can take prompts the question: do all ESG actions count the same?

THE PROBLEMS LIE IN HAVING NO STANDARD

There is almost no universal standard to determine an ESG. A recent analysis from MIT Sloan Management Review states that this stems from the fact that every company measures ESG uniquely. Picture a certain energy firm that invests in various environmental funds and a consumer goods brand that spends billions to remodel its entire business structure to reduce its emissions. It might be a surprise that both companies pass their ESG standard—being able to claim their "adherence" to ESG. We can see a glaring problem here: the magnitude of impacts from these two firms isn't the same. The same MIT source suggests this happens due to the popularity of ESG investment, which spurs companies' desire to "check the box." Many firms can gain millions of environmentally-conscious investors' capital while doing almost no tangible action that nurtures the E, S, and G.

SUSTAINABLE BUSINESS ACROSS THE BOARD

To be fair to the corporate sector, just as no company is the same, so too is it a challenge to develop a matrix that can measure every ESG action against one another. However, this cannot be the excuse for management wishing to make real impacts. Creating tangible outcomes requires result-oriented ESG measuring tools and the instilling of a sustainable mindset and activities across the board. Via the former (developing the said measurement) businesses can gauge whether their actions benefit the true receivers. According to the UK Financial Conduct Authority, this means directly investing in creating values for stakeholders and reducing intermediaries—charities, funds, etc. More middle people means less money to those in need. Besides, with the latter (communicate the message of sustainability across the organization) businesses can ensure that not just the leadership or a few departments know about its ESG initiatives. Only when everyone works together will the whole company drive sustainable actions holistically.

While making ESG actions is intrinsically a GREAT initiative, companies must take precautions to not fall into the trap of greenwashing—doing good merely as publicity. With result-oriented goals and clear organizational communication, impactful actions can take hold, driving inclusive growth for all.

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