Environmental, Social, and Governance (ESG) has gained encouraging momentum as a measure of a company’s commitment to social responsibility alongside profitability. Driven by the increasing demands from different stakeholders in business, many companies have jumped on the ESG bandwagon in recent years.
However, it occurs to me that some companies which claim to have “embraced'' ESG may not be genuinely committed to the cause. There are a mix of companies adopting ESG today. Some are just starting out without a solid plan, while others are still hesitant due to the costs, efforts, and time involved. Some are taking gradual steps in the right direction with genuine commitments, but many are doing it for show or purely for compliance purposes. Unfortunately, there is also a group of companies that make false or misleading ESG claims to allure customers and investors.
None of us wants to be lied to or misled one way or the other. Distinguishing authentic ESG efforts from deceitful ones is crucial. Fake ESG companies and their deceptive acts can undermine the integrity of others’ ESG efforts, hurting the trust of consumers and investors who are looking to support genuinely sustainable and responsible companies.
I remember an instance when I was still a kid ordering from a “plastic free” takeaway restaurant. I initially thought to myself how environmentally friendly this restaurant was, as they used wooden utensils and paper straws. However, as I tried to put my straw into the cup of drink, I realized that the cup lid was made from plastic. This incident led me to question the validity of some “environmentally friendly” claims.
As a consumer or individual investor, how do you point out these deceptive ESG companies or deceitful acts? Generally, there are five key factors to consider.
1. Transparency: Legitimate ESG companies clearly explain their sustainability practices and initiatives, and openly share relevant data and metrics to back up their claims and performance. If a company offers limited information and evidence of their efforts and impacts, it could be a red flag.
2. Verification: Independent verification by reputable third-party organizations is vital to validate ESG claims. Certifications, such as “B Corporation”, help establish credibility and show that a company meets rigorous environmental and social performance standards.
3. Consistency: Actions speak. Check if a company's efforts align with its stated sustainability goals. Look for specific actions and initiatives it has taken, rather than just buzzwords or vague promises. Watch out for unrealistic claims or overly ambitious promises.
4. Track Record: Review a company's past performance in delivering on its ESG commitments. This should help one recognize a trustworthy ESG company even from a distance. The key is to look for tangible results and continuous improvement.
5. Credibility & Reputation: At the end of day, integrity builds trust. Research if a company has a history of legal or ethical violations, controversies, or regulatory sanctions. Even a well covered up company would have telltale signs that its ESG claims are inauthentic.
Keep in mind that this is an oversimplified perspective. Debunking fake ESG companies can be complex. Nowadays, there is lots of fanfare and noise about ESG in business. It is imperative to be ESG savvy and make informed choices. Stay away from the ESG imposters, and channel our support to the genuinely responsible businesses. Don’t let a few bad apples tarnish the well-intentioned ESG efforts and hinder the progress made by the rest.
Author: Billy He and Jeffrey Tong - ICSD