A cautionary story of poor environmental, social, and governance information - false (ESG) claims
Environmental, social, and governance (ESG) investing refers to a set of standards for a company’s behaviour used by socially conscious investors to screen potential investments. ESG is used to screen investments based on corporate policies and encourage companies to act responsibly. With the rapid growth of ESG investment funds in recent years, it's important to be aware that some companies may be insincere or misleading in touting their ESG accomplishments. Fortunately, there are now plenty of mutual funds, brokerage firms, and robo-advisors offering investment products that employ ESG principles, so you can make sure your investments are going towards companies that are acting ethically.
In mid-2022, the German authorities raided asset managers DWS, after allegations of large scale 'greenwashing' were uncovered by the head of sustainability turned whistleblower, Ms. Desiree Fixler. https://www.forbes.com/sites/bobeccles/2023/01/17/a-whistleblowers-tale-as-told-by-desiree-fixler/?sh=4f6e7e6c64d1
At much personal expense to Ms Fixler, and untold reputational and value impact to DWS, we submit that ESG measures ought to be properly calculated and based on credible, reliable and observable data. As this is an evolving area of compliance, it is incumbent on management to have in place a solid approach to gathering facts and reporting them honestly. Responsible and ethical businesses should be striving to ensure the quality of environmental, social, and governance (ESG) information.
How should you gather high quality environmental, social, and governance information to boost your (ESG) posture?
Carefully and thoughtfully. We recommend the following approach to performing due diligence on the data and information you use to compile ESG statement - applicable for all businesses:
Identify and assess the material ESG issues that are relevant to the company.
Develop a framework for collecting and analysing ESG data.
Establish a process for verifying the accuracy and completeness of the data.
Overreliance on unchecked environmental, social, and governance data?
A word of warning here: we strongly recommend that your teams fully understand the nature, extent and accuracy of the data sets used to develop your ESG posture. To verify data, ideally you should be talking and interacting with primary sources - this may include suppliers, former suppliers, customers, agents and any other party with whom you rely on to provide services or goods that your business relies on. Of particular importance is for you to have a wide cross-section of views and facts that when aggregated, give you a clear picture of whether you have a healthy Environmental, Social and Governance posture. Merely paining a rosy picture of your ESG health without actually interrogating high risk areas (such as whether your suppliers engage in modern slavery practices - which itself is often hidden until you look carefully), can result in you publishing misleading statements, and may also be considered fraudulent if you do so with intent, leading to actual or potential loss to others, or a false 'boost' to your share price, leading investors to invest funds into what they believe is a healthy ESG shaped business
Once you have a firm grip and thorough understanding of where your data and information comes from and you can rely on it:
Develop a plan for communicating the ESG data to stakeholders.
Establish a process for monitoring and evaluating the company’s ESG performance.
Develop a system for tracking and reporting progress against ESG goals.
Engage with external stakeholders to ensure their views are taken into account.
Develop a plan for responding to any negative feedback or criticism.
Develop a plan for integrating ESG into the company’s overall strategy.
Develop a plan for integrating ESG into the company’s operations and management.
Have the ESG data audited by an independent expert before you publish your statements.