Misleading communications by companies about environmental, social and governance issues, also known as “greenwashing,” is on the rise, according to a report from ESG research provider RepRisk AG, which highlighted a 70% jump in climate-related greenwashing incidents in the past year among banks and financial firms.
The report focused on risk incidents that could materialize into direct adverse impact on the environment through companies’ operations and was aimed at investors in these companies and activities, such as firms that finance oil and gas activities.
“The association between financial institutions and fossil fuels is widely understood to be high risk, with investors calling for an end to the financing of new oil and gas projects,” the report stated.
According to the report, nearly 1,900 companies were linked to a risk incident involving misleading communications in the past year. Of those, 1,160, or 63%, were associated with the issue for the first time. The report also found that 25% of climate-related ESG risk incidents worldwide are linked to greenwashing, up from 20% a year ago.
This year’s report also expanded its coverage to include so-called “social washing,” which RepRisk defines as a contradiction between a positive image and an underlying social issue, such as human rights abuses, corporate complicity or child labor. According to the firm, social washing occurs when companies describe themselves in a positive light to protect their reputation and financial performance by obscuring an underlying social issue.
“As with greenwashing, social washing is driven by multiple interconnected factors, which can include changing consumer expectations, increased competition, and an evolving regulatory landscape,” the report stated. “On average, misleading communication surrounding a social issue is 12% more severe than environmental claims, indicating the acuteness of the risk.”
The report added that when both environmental and social issues are involved, misleading communication risk incidents are 20% more severe than greenwashing alone.
RepRisk cited social washing of human rights abuses and corporate complicity within the software and computer services sector, where risk incidents are linked to privacy violations and supply chain issues.
“While sometimes overlooked, data privacy is a human right, and instances of hollow promises of data protection can materialize into adverse financial and reputational impacts for companies, with the global average cost of a data breach reaching $4.45 million this year,” according to the report. “Further, risks related to data privacy can materialize into adverse impacts for the consumer as well.”
RepRisk’s report also found that many companies in travel and leisure conceal human rights issues concerning instances of discrimination and negligence. It added that poor employment conditions are common to the retail and food and beverage industries, notably as they pertain to supply chain issues, migrant labor and salaries and benefits.
However, unlike greenwashing, social washing practices escalate at a slower rate. The report found that the number of social washing risk incidents with no environmental component increased 15% over the past year to September from the prior year, compared with 35% for greenwashing alone.
“The expectation of competitive advantage derived from an image of sustainability has opened the door to green and social washing,” Philipp Aeby, RepRisk’s CEO and co-founder, said in a release. “A lack of accountability around a rapidly evolving landscape of corporate sustainability has helped keep this door open for a long time. Despite this, in recent years, symbolic sustainability has backfired for many, as the media, public, and regulators criticize unfounded claims.”
Aeby added that “banks, asset managers, investors, and other market participants need transparent data on adverse impacts to assess a company’s true business conduct and mitigate green and social washing risk in their portfolios and supply chains.”
RepRisk’s ESG data set dates to 2007, according to last year’s inaugural greenwashing report.
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Tags: and governance, Aquity, Diversity, environmental, ESG, Greenwashing, human rights, Inclusion, RepRisk, Research, social, social washing