Explore the backlash against ESG and how companies can overcome these challenges to foster transparency and build trust.
Integrating Environmental, Social, and Governance (ESG) factors into business strategies isn't just a trend—it's a pathway to unlocking new opportunities for business expansion and increasing brand trust. Embracing ESG can lead a company toward more sustainable business practices that resonate with both consumers and investors.
Companies often begin ESG reporting to provide transparency to their customers and investors, showcasing their performance regarding their environmental impact, social responsibility, and governance practices. Over the past decade, ESG has gained significant traction, particularly among larger corporations with the resources to implement and report on these initiatives. However, smaller businesses are increasingly interested in ESG as they seek investor support and aim to differentiate themselves in the market. Investors often favor companies that report their ESG ratings, viewing them as committed to mitigating risks and ensuring long-term sustainability. Likewise, consumers increasingly value environmentally friendly practices and inclusivity, appreciating the deeper understanding of the companies behind the products they purchase.
However, despite its emphasis on transparency, ESG has become a contentious topic across the political spectrum. In this blog post, we’ll explore the reasons behind this polarization and examine how ESG can be reimagined as a genuine tool for both investors and consumers.
In this blog post:
Common Challenges in ESG reporting
While many companies are beginning to be more transparent about their sustainability data, preparing an ESG report is not a simple undertaking. ESG reports typically include data on energy and water usage, greenhouse gas emissions, transportation, waste management, raw materials, and more. Unfortunately, there is no unified reporting framework or a single standard for ESG metrics, making it difficult to compare ESG performance across companies, industries, and regions.
Various standards and frameworks, including the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and more, can be used by companies to structure their ESG reports. However, there is significant variability between these frameworks.
For example, the GRI is one of the most widely used frameworks globally, focusing on broader stakeholder engagement. It emphasizes transparency in reporting environmental, social, and governance impacts, encouraging companies to disclose a wide range of information that is relevant to various stakeholders, including customers, employees, and communities.
On the other hand, SASB is more investor-focused, providing a standardized guide for preparing ESG disclosures specifically for financial stakeholders. SASB’s framework helps companies determine which sustainability information is financially material and how to prepare the necessary industry-specific categories in their reports.
The plethora of reporting standards and structures can create confusion and undermine the transparency that ESG reports are designed to provide. Reports that do not align with certain standards or omit metrics relevant to the reporting company’s industry may be perceived as misleading or incomplete.
Data Limitations
Another challenge to effective ESG reporting is comprehensive data collection. ESG metrics often span across a company’s facilities and operations, making it difficult to gather all relevant data in one place. Manually collecting data from different departments, facilities, geographic regions, and production lines can be complex and time-consuming.
A full ESG report depends on robust data, and if data collection is not streamlined, or the data is unavailable, the integrity of the reports may be compromised. While technology-based solutions exist that aim to centralize ESG data collection, the majority of companies reporting their carbon footprint are doing it manually, and not reaping the streamlining benefits that such software-based solutions can provide.
Greenwashing
While attempting to promote more sustainable practices, some companies may run the risk of greenwashing their business—issuing unsubstantiated statements or promoting superficial environmental practices that may seem harmless but can severely damage credibility and trust in the long run.
Greenwashing occurs when a company makes false or misleading reports about their environmental impact, leading stakeholders and customers to believe that they prioritize sustainability when this is not the case. This can include publishing misleading environmental metrics, highlighting environmentally friendly aspects of their product while concealing environmental wrongdoing (e.g. promoting sustainable packaging on a product with high toxicity) or outright fabricating environmental data.
The Volkswagen Emissions Scandal of 2015 in the United States offers a striking example of greenwashing. Volkswagen centered a major marketing campaign around their diesel-powered cars, touting them as low emission vehicles that were revolutionizing the automobile industry. In reality, not only were these claims false, but the cars were equipped with devices designed to cheat on emissions testing. After the scandal was revealed, it was found that the vehicles emitted up to 40 times the legal limit of nitrogen oxides during real-world driving conditions. The company’s stock plummeted, they lost the trust of their investors and customers, and had to invest significantly in restoring their brand reputation.
Greenwashing can affect even the companies with the best intentions, negatively impacting their brand reputation and future business opportunities. For instance, in 2021, furniture giant IKEA was found to be using wood that was cut down from protected forests. IKEA claimed to be unaware that their supplier engaged in these practices, and took responsibility by cutting off ties with the problematic logging company. They also reconfirmed their commitment to the environment by instituting their “Buy Back and Resell” program, encouraging customers to bring back old furniture to be resold or recycled, in return for an in-store voucher to purchase a new product. The incident serves as a reminder that even well-meaning companies must make significant steps to avoid greenwashing, including rigorously vetting all components of their supply chains.
The lack of universal standards and metrics for reporting ESG data makes it challenging to achieve full transparency. New regulations, such as the Corporate Sustainability Reporting Directive (CSRD) in the EU, aim to standardize reporting and prevent greenwashing by enforcing more rigorous and transparent standards. In the meantime, some companies have resorted to "greenhushing"—opting not to disclose any ESG information to the public to avoid potential greenwashing accusations.
Greenhushing
Greenhushing has become a rising trend in recent years, spurred by major greenwashing scandals of well-known companies. Greenhushing occurs when a company deliberately withholds its environmental goals and sustainability data, avoiding possible criticism from stakeholders. By keeping this information private, companies limit the public’s knowledge of their ESG efforts and their impact on the environment.
While greenhushing is often driven by a desire to avoid scrutiny, it is also influenced by the increasingly polarized political environment. With criticism coming from both ends of the political spectrum—where the right view ESG as "woke capitalism" and the left see it as impractical due to measurement challenges—companies find themselves navigating a minefield when deciding which data to disclose.
However, greenhushing is NOT an ideal strategy. By hiding information, a company becomes less transparent with investors and customers , which can lower brand trust. While withholding ESG information might be intended to prevent greenwashing accusations, it may actually lead to increased scrutiny as investors and customers wonder what the company might be hiding.
Finding Solutions to ESG Reporting Challenges
To address the challenges in ESG reporting, companies can aim for better organization and management of data. Centralizing data can help keep ESG information orderly and accessible, while also streamlining the third-party assurance process. Until a universal standard for ESG reporting is established, companies should ensure they align their reports with industry-specific standards to maintain transparency with investors and consumers, such as those provided by SASB and the GRI, to maintain transparency with investors and consumers.
To avoid accusations of greenwashing, there are a variety of strategies a company can adopt (that do not include greenhushing), ranging from more small changes to more significant actions:
Set smaller, realistic goals publicly to demonstrate a commitment to improving environmental practices without overpromising.
Collect and monitor scope 3 emissions data from the company’s upstream and downstream operations, ensuring that suppliers are in line with the company’s environmental goals and strategies.
Use statistics and facts in marketing campaigns to effectively communicate the company's environmental impact.
Undergo third party assurance to verify the company’s environmental data.
Consistently educate employees to ensure they are aligned with the company's messaging.
The ECO-OS Solution
Subscribing to an ESG reporting software can help a company not only avoid the pitfalls, but enhance brand reputation and unlock new business opportunities. ECO-OS is an online ESG accounting and intelligence software platform that streamlines the process of ESG reporting. With various user-friendly tools to collect data from diverse industries, regions, and facilities, the platform centralizes ESG data collection and management, preparing dashboards and reports to present to stakeholders and to auditors alike.
ECO-OS offers an easy to use platform with capabilities to add multiple users to an account, allowing managers from different departments to record all of their data in one secure location. ECO-OS can also create reports based on the standardization of your choosing to make your company as transparent as possible across all relevant metrics.
Conclusion
Navigating the complexities of ESG isn't without its challenges, from the risk of greenwashing to the ever-changing litany of regulations. Despite these hurdles, the push toward greater transparency, accountability, and sustainability remains critical for a company’s long-term success. By addressing these challenges and criticisms of ESG head-on and being aware of the pitfalls, companies can strengthen their ESG strategies, securing a more sustainable and resilient future.
Glossary
ESG (Environmental, Social, and Governance): A comprehensive framework used to evaluate a company's commitment to sustainable and ethical practices. ESG encompasses three key areas: Environmental factors, such as a company's carbon footprint, resource usage, and environmental stewardship; Social factors, including employee relations, community involvement, and human rights; and Governance factors, which assess corporate leadership, transparency, ethical behavior, and stakeholder engagement. ESG criteria help stakeholders understand a company's long-term sustainability and ethical impact on the world, guiding investment and operational decisions.
ESG rating: A score used to compare the ESG activities of different companies that is commonly used by investors and customers to evaluate a company's risk and impact. Some popular ratings providers include: The Carbon Disclosure Project (CDP), MSCI, and Sustainalytics, among others. To achieve an ESG rating, companies typically have to undergo third party assurance for their ESG data in accordance with the rating agency's criteria.
Greenhouse gasses (GHG): Gasses that allow light and heat from the sun to enter the earth's atmosphere, but trap heat on earth, preventing it from being released back into space. These gasses are believed responsible for human-caused (anthropogenic) climate change. The main GHG's that have an effect on climate change include: carbon dioxide (CO2), nitrous oxide (N2O), methane gas (CH4), refrigerant gasses (HFC's).
Greenwashing: A phenomenon where a company makes misleading or false claims to convince consumers that its products are more environmentally friendly or have a greater positive environmental impact than they truly do. This is often viewed as a critique of Environmental, Social, and Governance (ESG) practices because it undermines the credibility and effectiveness of ESG efforts.
Greenhushing: The action of a company choosing not to share its environmental, social, and governance (ESG) information with the public, including stakeholders and investors. This may be done to avoid accusations of greenwashing, manage concerns from investors, keep competitive secrets, or because their ESG practices are not strong or are uncertain due to changing regulations. By not sharing this information, the company limits transparency and makes it harder for others to evaluate how sustainable and responsible it really is.
ESG Frameworks: An ESG framework is a set of guidelines that helps organizations measure and report their performance in Environmental, Social, and Governance areas. It provides criteria for assessing a company’s impact on the environment, social responsibilities, and governance standards. ESG frameworks, like the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB), enable businesses to align with sustainability goals and communicate their responsible practices to stakeholders. Following an ESG framework can enhance a company's reputation, reduce risks, and improve access to investment opportunities.
Sustainability Accounting Standards Board (SASB): A framework that provides industry-specific standards to guide companies in reporting their ESG metrics. SASB standards highlight the most material ESG issues relevant to different industries, providing companies with specific guidelines to focus on in their reporting and decarbonization efforts.
Global Reporting Initiative (GRI): An ESG reporting framework of universal standards, and industry-specific standards. They are the world's most widely used sustainability standards focusing on how a company's ESG reporting affects the economy. Reporting with the GRI is voluntary but are often employed to meet stakeholder expectations and adhere to regulations.
Corporate Sustainability Reporting Directive (CSRD): An obligatory reporting framework enacted by the European Parliament that applies to certain companies with operations taking place in the European Union. The mandate requires companies to report on specific ESG metrics, conduct a double materiality assessment (considering both the impact of the company on the environment and the impact of environmental issues on the company), and undergo third party assurance to verify the accuracy and reliability of their ESG disclosures.
Double Materiality Assessment: Evaluates not just how the company’s operations affect the broader environment and society, but how external environmental and social issues may impact the company's financial performance and reputation. The CSRD mandate requires companies to report only on ESG issues deemed material, supported by their double materiality assessments. This approach provides a comprehensive understanding of risks and opportunities essential for navigating today's business landscape.
Scope 3 emissions: Indirect emissions involved in producing a product, including upstream and downstream emissions. Upstream emissions relate to those activities that support the production of your product before manufacturing (i.e. production and transportation of raw materials, business travel, capital goods, etc.) and Downstream emissions support the distribution and end-of-life of your product (processing of sold products, waste disposal, use of product, etc.) Scope 3 emissions are often the hardest to collect and typically account for the majority of emissions stemming from a product's production (for non-vertically integrated companies.
Third Party Assurance: The verification and validation of your sustainability report by an independent and qualified external auditor. The review process can be conducted to examine your data, methodologies, and disclosures against established standards, frameworks, or principles (e.g. ISO, GHG Protocol, PRI). There are two different levels of assurance that can be received: limited (lower cost but less rigorous) and reasonable (more thorough and provides a higher level of confidence in the ESG data).
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