ESG has Led to More Greenwashing

By George P. Nassos

Environment, Social and Governance (ESG) is a business derivation of the triple-bottom-line (planet, people, profit/earth, equity, economics) which was developed by John Elkington in 1994. This originated by the World Commission on Environment and Development (WCED) in 1987 when it was chaired by Gro Harlem Brundtland, then Prime Minister of Norway, with a focus on sustainable development. It resulted in a report called Our Common Future which led to the term “sustainability”, now clarified to mean “environmental sustainability” or “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”

Following the triple bottom line, companies were concerned with environmental and social issues while improving the economics of the company. Around 2005, there was a movement to continue with environmental and social issues but introduced governance, that is what needs to be implemented in the company administration to achieve the environmental and social goals. When they are achieved, profitability would also be achieved. And in fact, that is exactly what happened.

Data have shown that companies operating with ESG have outperformed those companies that did not adopt ESG strategies. As a result, several mutual funds were created that included only ESG companies. Not surprisingly, these funds easily outperformed most of the other mutual funds. The performance numbers are even more compelling in the long term. In a study of three- and five-years performance shows that all ESG focused funds were way ahead, in terms of returns, of their equivalent non-ESG fund. ESG strategies tend to be long-term investments and that is when the numbers show they can make a difference to returns. 

BlackRock, the world’s largest asset manager with US$ 10 trillion in assets under management as of January 2022, has been focused on ESG companies for many years. In fact, Larry Fink, the company CEO, sends a letter annually to the CEOs of the companies whose funds are managed by BlackRock and emphasizes that these companies must adopt ESG to remain in BlackRock. He truly believes in ESG and its impact, but some people question to what degree BlackRock enforces that ruling.

Companies that do not follow ESG operating principles have noticed that many investors are seeking ESG companies because of their performance in the stock market. To take advantage of these investors, some of the non-ESG companies are announcing that they have adopted ESG principles with the intent of attracting more investors. They introduce ESG strategies in their annual report, SEC documents, and on the company’s website. They probably even hire or appoint a CSO (Chief Sustainability Officer) or equivalent. In many cases, the CSO may not even have any experience in sustainability.

I recently attended a board meeting where a decision was to be made on selling a piece of property to another company. The purchasing company had all the qualifications to obtain the property including its emphasis on ESG. Prior to attending the meeting, I went to the company’s website where a page was dedicated to ESG. After reading that ESG page, it became obvious to me that this company did not really know what is meant by ESG, let alone endorsing ESG in its operating strategy. This is a good example of greenwashing, something that is becoming more prevalent.

For many years ESG dominated funds have greatly outperformed non-ESG funds, but in recent years, the ESG mutual funds are not doing as well. The main reason is that portfolio managers have included some non-ESG companies in their fund because of greenwashing. JPMorgan Chase recently made an assessment that many firms are misleading investors with statements about climate strategies. One of the problems is that companies are making statements about achieving net-zero by a certain date, but it is difficult to determine how realistic it is for the company to achieve that goal. Without the ability to determine if a company is truly operating to meet its ESG strategies, there may be more companies introducing greenwashing in their company promotions. Fortunately, regulators are introducing the need for companies to provide documentation and explanations on certain environmental issues. The climate theme may be the easiest to crackdown on greenwashing since scientific knowledge is widely available and points to the need for bolder and faster action.

Whether you are an investor, a supplier, a customer or just looking for employment, a thorough analysis of the company is recommended, particularly if you care about the environment.