The financial markets’ increasing attention on ESG investing has largely placed corporations under a microscope, with ever-growing scrutiny to discern whether they are following-through on their stated commitments to achieve better environmental, social and governance practices.
It seems many companies have historically sought to sidestep controversies, and their associated, potential adverse financial impacts, by creating certain false perceptions about improving ESG-related issues within their operations.
Some analysts have highlighted certain companies in the tobacco industry, for example, for long-arguing against certain health risks caused by cigarette smoking, or chemical and oil firms for protecting the production of lead-based products in the 1960s and 1970s.
Corporations that merely give the impression they are actively improving their business standards – in line with ESG-related principles, and the UN’s sustainable development goals (SDGs) – have largely received certain branding within communities whose values are pinned to environmental, social, and governance issues.
For example, terms such as “green washing”, “social washing”, “blue washing” and “pink washing” have arisen, along with a call within the global financial markets for higher standards of corporate accountability.
But what do these terms mean? And how can companies be held accountable for their actions, when the same level of generally-accepted standards that apply to their financial data don’t apply to their compliance with ESG?
While the term “green washing” dates back to the mid-1980s, companies that aimed to mislead the public they were environmentally friendly, whether through ads or corporate branding, extends further back in history.
Analysts have cited several instances of green washing by certain energy and fossil fuel companies throughout the past several decades, including Westinghouse’s nuclear power plant ads, marketing campaigns conducted by Chevron, BP’s branding colors, and, more recently, Italian oil giant Eni’s marketing ploy that claimed its ‘Eni Diesel+’ had a positive impact on the environment.
In fact, that firm was recently hit with a €5 million fine, after Italy’s advertising regulator ruled, in part, that it was particularly deceitful for Eni to use “Green Diesel’ and the qualifications ‘green’ and ‘renewable’ to refer to the Hydrotreated Vegetable Oil, or HVO, component of their product.
The ruling stems from findings of environmental harm posed by palm oil, which is understood to be a catalyst for rainforest and wildlife destruction.
Apart from the regulatory fine, any further production of diesel fuel containing palm oil has come under fire by Italian activist-led, non-governmental organizations, who have petitioned in the tens of thousands to halt the practice.
Such negative media attention, potential activist-led regulatory reform, and financial harm are some ways in which Eni, or a similar company, may be held accountable for their greenwashing actions.
Given the consequences, they may decide to follow-through on improving their business practices to avoid further financial and reputational damage, which could also come from ESG-concerned stakeholders, as well as shareowners, who hold sway over the composition of the company’s board, as well as its stock price.
When conducting your due diligence, you may also find that misleading business practices extend beyond the environment into other realms within ESG investing.
“Social washing,” for example, generally refers to the deceptive marketing practice of being socially conscious, when the firm falls far short of those standards it conveys.
Recall the social bonds we discussed in our earlier lesson, for instance, which, when reading through an issuer’s prospectus, may reveal uses for proceeds that are not aligned with any material social benefits – or even, perhaps, with any social project.
Meanwhile, “blue washing” refers to the practice of businesses using their association with the UN Global Compact, and its voluntary compliance with its 10-stated principles, solely to boost their image as a proponent of ESG and the UN’s SDGs, with the primary aim of diverting attention from their controversial business practices.
Also, “pink washing” is yet another practice a company may be engaged in – which involves creating a false perception about upholding LGBT rights. A firm, for instance, may sponsor an LGBT pride event, but fail to take any action to support or protect their own LGBT employees from harassment or discrimination against professional advancement.
Using Big Data for Actionable Accountability
Against this backdrop, while the use of Big Data in conducting fundamental analysis may help expose green washing, social washing, pink washing, and other forms of potentially deceptive ESG-related practices, holding companies accountable to those ESG standards adds another layer of action – which may come from concerned stakeholders, shareowners, activist engagement, as well as from other forms of financial and reputational damage, such as regulatory fines and negative media attention.
Moreover, many corporations appear to be growing increasingly aware of the values of the millennial generation, who, according to a recent study by Ernst & Young (EY), account for the vast majority of those who cite ESG as a central goal in their investment plans.
EY states that as “millennials begin to engage with wealth and asset managers, they will continue to disrupt the industry due to their sizeable population, inheritable wealth and preference for digital channels of communication,” adding that firms must “mobilize quickly to develop the capabilities and products needed” to support the likely surge of this generation through sustainable investing.
Given the growth of ESG investing, it is likely firms have an increasing motivation to shun these false perceptions and commit to greater standards of internal accountability.
Want to Know More?
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.