In the first instalment of a new blog post series delving into the world of sustainability, we dive into the fascinating realm of the Environmental, Social, and Governance (ESG) criteria that have become increasingly pivotal in assessing business sustainability and guiding investment decisions against a backdrop of greenwashing concerns.

Originally introduced in the 2006 UN Principles for Responsible Investment (PRI), concerns surrounding the accuracy and reliability of these ESG metrics have emerged, particularly with the rise of “greenwashing,” where companies misrepresent their sustainability practices.

Recent instances illustrate this growing disquiet. A European Securities and Markets Authority (ESMA) report found that nearly two-thirds of publicly exposed controversies involve greenwashing, highlighting a clear disconnect between rhetoric and reality. Furthermore, the Financial Conduct Authority (FCA)’s finalisation of stricter sustainability disclosure requirements, including an anti-greenwashing rule, underscores the seriousness of the issue.

Even the World Economic Forum (WEF) recognised the need for greater accountability with this year’s Davos 2024 theme, “Rebuilding Trust,” directly addressing concerns about misleading sustainability information.

A step back

In response to the increasing scrutiny and pressure surrounding ESG criteria and behaviours, particularly fear of the “greenwashing” phenomenon, some companies have chosen to step back. Barclays and HSBC, for example, exclude M&A from their sustainable finance targets even if they see potential ESG aspects, arguing the deals don’t necessarily translate to direct sustainable impact.

Several prominent asset managers, including Abrdn, Morgan Stanley, and UBS, recently removed sustainability terms from some of their funds’ names.

This aligns with GlobalData’s Banking Predictions for 2024, which forecast a continued decline in ESG popularity that began in 2021, as illustrated in the graph below. The report mentions a poll where over half of respondents believe that most companies’ ESG commitments are just marketing tactics and not genuine efforts, suggesting a potential erosion of trust in corporate ESG initiatives.

Sustainability branding might be cooling down. This could signal a move away from solely sustainability-focused marketing, perhaps towards a more balanced approach. While unclear if temporary or permanent, it sparks questions about the future of corporate social responsibility in branding.

But ultimately it’s clear that, right now, the ESG landscape is somewhat twisted. Greenwashing parades profit in eco-friendly garb, eroding trust in genuine sustainability efforts.

We face a choice: stricter regulations to curb the charade or a cultural shift where responsibility becomes the bottom line. Can profit and the planet truly tango? The answer rests with our collective vigilance.