Incorporating the ESG agenda without greenwashing

In today’s world where organisations are scored and evaluated by investors, consumers, legislators, and other stakeholders for their policies and performance on Environmental Social and Governance (ESG), many companies have started taking notable steps to be more sustainable and environment-friendly.

This change is brought about due to the introduction of new reporting requirements on ESG parameters globally, such as the Business Responsibility and Sustainability Report in India or the Corporate Sustainability Reporting Directive in the European Union (EU). 

Greenwashing on the rise

To take advantage of the changing narrative—where ESG investing has gained popularity and non-financial considerations are incorporated into investment decisions—it is seen that greenwashing has become extremely prevalent and an integral part of corporate marketing practices.

Greenwashing means to make something (product, policy, or practice) appear to be more environmentally friendly or less environmentally damaging than it is. 

However, environmentally conscious citizens, non-governmental organisations, and activists are raising awareness by calling out corporations over their misleading claims and exposing instances of greenwashing in innovative ways.

These include rating organisations on greenwashing indexes, social media and boycott campaigns, greenwashing awards, and class action suits against companies for false claims.

It has resulted in an increase in scepticism and distrust among stakeholders in the claims made by several well-recognised companies about their environmental impact. 

Legislations such as India’s Central Consumer Protection Authority draft guidelines on the prevention and regulation of greenwashing and the EU’s Green Claims Directive on demonstrating voluntary green claims will further put pressure on companies.

In times like these, when greenwashing comes not only with the risk of loss of reputation and green litigation but also strict action by government departments, companies should be careful and take deliberate steps to effectively integrate ESG considerations into their business strategies without resorting to greenwashing. 

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Walking the ethical path

Many organisations assist companies to accurately determine their environmental impact and help companies identify areas they can target to reduce their carbon footprint.

It is suggested that companies should establish SMART (i.e., specific, measurable, achievable, relevant, and time-bound) ESG goals and be transparent about the strategies employed to achieve them to maintain public confidence and accountability.

Defining precise targets, such as reducing carbon emissions by a specific percentage or achieving a specific level of diversity and inclusion, can help in building a concrete framework for action, and setting realistic timelines ensures these goals are perceived as credible rather than aspirational. 

Companies must also regularly report to the public their ESG performance to avoid greenwashing by highlighting not only their achievements but also the areas that need improvement.

They must undertake responsible marketing and ensure all communication about their ESG initiatives is true and backed by evidence. For instance, Norway’s Consumer Authority had ruled that a clothing company could not substantiate how its products sold under a certain collection for a higher price were more sustainably produced than the other products.

Additionally exaggerating or overstating achievements and use of vague terms should be avoided. Being transparent on the limitations and challenges of ESG initiatives can further help build trust with stakeholders. 

Incorporating the ESG goals into the core business strategy to ensure it is not treated as a secondary initiative but is embedded in the companies’ daily operations/functioning is another crucial element.

Companies should also try and cultivate a culture of sustainability within the organisation by educating and engaging employees at all levels about the importance of ESG objectives, instructing them on how they can contribute to the same, organising sustainability training programmes, forming green teams, etc.

With many corporates appointing chief sustainability officers and chief trust officers, there should be a clear and strong commitment and support for ESG goals. 

Prioritising sustainability can help shape a holistic culture within the company. One such example is Unilever’s Sustainable Living plan, which aims to integrate ESG principles across all its operations and has had a positive impact on the company’s reputation and performance.

Another key consideration for companies is to acquire environmental certification and have their data audited by trusted third parties to add credibility to their claims.

However, they should be careful while adopting and repeating claims of third parties (such as in cases of collaboration with other companies or NGOs) and must ensure that the representations are factual and have been thoroughly scrutinised and verified for accuracy. 

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Building a sustainable future

In an increasingly conscious world, no straitjacket formula can be applied to become sustainable overnight. That said, incorporating a robust ESG agenda in both letter and spirit is key. It would also depend on the unique interrelationship between an organisation and the society and the opportunities that result from that interrelationship.

However, companies should ensure they are adopting the principles of transparency and accountability in the journey towards sustainability. At the same time, they must set SMART goals, engage in continuous dialogue with their stakeholders and integrate ESG parameters into their core business strategy. 

(Vanita Bhargava is a Partner, and Tijil Thakur is an Associate at Khaitan & Co.)