Last year, ESG assets worldwide were valued at nearly 17 trillion USD. According to Bloomberg, by 2025, they will be worth more than 50 trillion USD.
Investors today seem to be investing to the tune of a new strategy: in enterprises that are environment-friendly, socially responsible, and accountable to their stakeholders, from customers and investors to employees and non-profits.
Consequently, enterprises have an incentive to disclose their ESG performance metrics. The higher their ESG ‘score,’ the more valuable those enterprises are perceived.
But perception can be deceiving. While many enterprises are actually making sustainable change and creating ESG value, many are ‘greenwashing.’
The importance of ESG reporting solutions
ESG reporting solutions enable businesses to disclose data that outlines their contributions toward creating ESG value.
Not long ago, sustainability reporting services were mainly linked to environmental causes, like reducing one’s usage of non-renewable sources of energy. However, today, the term has expanded to cover social causes, like equality and diversity, and transparency and accountability in corporate governance.
More than half of today’s investors (KPMG), especially millennials and those who belong to Gen Z, are inclined to invest responsibly. Or in companies that create ESG value — companies that don’t exploit people or the planet for profit. Therefore, companies that don’t comply with the market’s ESG norms can suffer serious financial consequences. Indeed, Accenture recently reported that high ESG performance is correlated with high financial performance.
And it does make sense.
Before, religious beliefs prevented investors from investing in liquor or tobacco. Today, however, political and cultural beliefs deter investors from investing in companies known to abuse resources, labor laws, or user privacy. In fact, the companies suffer a double blow. Modern consumers, too, want to consume consciously and responsibly. They don’t wish to be associated with a brand mired in regulatory controversies and accused of moral failings. Consumers are loyal to brands that are an extension of themselves, and whose values resonate with theirs.
What then ESG reporting services cultivate is the ability to mitigate future risks. By outlining their contributions to creating ESG value, companies actively address ever-evolving stakeholder concerns, instead of concealing the data and risking looking non-transparent. Let’s not forget that in today’s business environment, it’s also an excellent marketing strategy.
And that’s precisely the problem.
Avoiding ‘Greenwashing?’
An enterprise engages in greenwashing by either labeling its partially green assets entirely green or concealing data that may harm its ESG score.
The rationale is quite simple: companies want to make the most of the hullabaloo around ESG. Companies that greenwash invest in aggressive marketing that cleverly communicates only what the stakeholders wish to hear.
Here’s an example. Sure, many goods are built from recycled objects. The packaging is paper, for instance. But what about the manufacturing plant that heavily contributes to greenhouse emissions? Or the exploitation of labor to cut down costs?
The problem is, that we lack rigid, globally accepted standards that dictate what qualifies as ‘green’ and what doesn’t. Instead of an ESG score formulated by an independent committee, ESG scores number in several hundred, developed by different ESG consultants relying on thousands of different factors and variables. Without official policies, there will always be room for cunning enterprises to exploit ambiguity.
Greenwashing makes the case for transparent ESG reporting solutions even stronger. Stakeholders want accountability — actual results, not just rhetoric.
