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Wouldn’t it be beautiful if every single company took societal and environmental issues seriously, rather than using them for their convenience?
Table of Contents
- What Is Greenwashing in ESG?
- Why Is ESG Greenwashing So Prevalent?
- How to Protect Against ESG Greenwashing?
- ESG Can’t Thrive Without Integrity!
Environmental, Social, and Governance (ESG) investing is experiencing significant growth. In fact, according to PWC, ESG-related assets under management are forecast to surge by 84%, jumping from $18.4 trillion in 2021 to $33.9 trillion by 2026. The promise? Financial returns with a conscience: investments that support lower emissions, better working conditions, and more diverse and inclusive organizations.
But… there might be a problem.
Not every company flying the ESG flag is walking the talk. ESG greenwashing is a growing concern for investors, regulators, and customers alike.
What Is Greenwashing in ESG?
Greenwashing in ESG occurs when companies attempt to impress stakeholders by exaggerating — or even falsifying — their environmental or ethical actions, particularly in reports and materials designed to attract investors.
To put it simply, it’s when ESG becomes a marketing tool, rather than a management philosophy.
ESG Greenwashing – examples:
- A fund labeled “green” might include companies that use fossil fuels.
- A company could tout its gender diversity while overlooking poor labor practices.
Or — as in the case of FIFA’s “carbon neutral” 2022 World Cup — claims of environmental stewardship may turn out to be unverifiable or flat-out false.
It’s a PR issue, sure, but it also undermines trust and misallocates capital.
Why Is ESG Greenwashing So Prevalent?
If we were to identify three main culprits, they would be the lack of standardization, regulatory gaps, and… haste. Let’s take a closer look at them.
1. Lack of Standardized ESG Ratings
ESG scores aim to assess a company’s impact on the environment, society, and governance practices. But here’s the catch:
- A company might score high overall due to strong governance, even if its environmental impact is damaging!
- ESG methodologies vary widely between agencies. What qualifies as “ESG compliant” to one provider might raise red flags for another.
- According to the OECD, ESG ratings lack transparency, and that’s simply asking for exploitation.
2. Regulatory Gaps
Regulations are tightening, yes (e.g., the EU’s Sustainable Finance Disclosure Regulation), but many markets still operate in a gray zone, where claims aren’t consistently verified or enforced. And here’s where ESG greenwashing occurs.
3. Investor Demand Outpacing Oversight
What does it mean? The rush to market ESG products and funds, fueled by investor interest, has outpaced regulators’ ability to distinct between what’s authentic and what’s not.
As a result, some ESG funds have included Shell, ExxonMobil, Nestlé, and Coca-Cola —companies previously accused of environmental or ethical controversies.
What Are the ESG Funds — and Are They Safe from Greenwashing?
ESG funds pool capital into companies that claim to meet specific environmental, social, and governance standards. But even greenwashing ESG funds can slip past filters. That’s how even well-intentioned investors can unknowingly support practices that are rather harmful. We’ve seen this happen especially in institutional portfolios and B2B investment partnerships, where ESG credibility is now a key component of reputational risk.
How to Protect Against ESG Greenwashing?
Want to avoid greenwashing traps? We got you. Follow these three steps:
- Demand transparency.
- Go beyond labels.
- Watch for regulatory updates.
In practice, it means that, as a customer or B2B contractor, you can (and should) ask for the underlying methodologies behind ESG scores. Be skeptical of broad claims, such as “carbon neutral,” without independent verification. If possible, push for more verification. And, lastly, stay ahead of regulations (the EU’s ESG taxonomy, SFDR, or the SEC’s climate disclosure proposal).
ESG Can’t Thrive Without Integrity!
For fintechs, banks, and asset managers, we have additional tips:
- Integrate real ESG metrics.
- Back up claims with data you can verify.
- Use transparent, tech-enabled frameworks.
Want to build trustworthy ESG products or platforms? Let’s discuss digital solutions that promote sustainability, credibility, and, above all, compliance.
You may also want to read about The Digital Future of Leasing.
