Addressing Greenwashing: Does a good ESG score equate to being a good company?

In this episode of “Debunking ESG Myths“, host Ravi Chidambaram dives deep into the world of greenwashing with guest expert Dr. Kim Schumacher from Kyushu University. They explore the various shades of greenwashing, from compliance and competence to financial strategies. They also discuss the essence of a “good” company, highlighting the importance of transparency and credibility as the true differentiators. As they unravel the complexities, they shed light on the evolving landscape of corporate sustainability and stakeholder expectations. Tune in now!

Discussion Topics: Does a good ESG score equate to being a good company?

• What is Greenwashing?
• What Makes a Company Good?
• Does a Good Score Make a Good Company?
• Sustainability Reporting
• Impact of Greenwashing
• Financial Greenwashing
• Why is Competence Greenwashing Problematic?
• How Would A Regulator Approach This Issue?

Transcript: Does a good ESG score equate to being a good company?

Ravi Chidambaram: Hi everyone. Welcome to ESG MythBusters, a podcast where we debunk, demystify, and deconstruct some key ESG preconceptions with unfiltered knowledge and data from key experts in the field. I’m Ravi Chidambaram, the CEO and founder of RIMM Sustainability. We’re an impact-driven SaaS company that advocates making sustainability accessible and actionable to all.

In this episode, we’re very happy to have Dr. Kim Schumacher, a lecturer at Kyushu University in Japan with us. Kim is a world leader in the field of greenwashing. Indeed, he coined the term competence greenwashing, which some of you may have heard of and is widely used now in the industry. Fantastic to have Kim with us today to go through this very interesting and often controversial topic. Kim, thanks for joining us today.

Kim Schumacher: Thanks for having me.

What is Greenwashing?

Ravi Chidambaram: Excellent. So let’s jump right into it. This is what we’re going to cover dear listeners today. What is Greenwashing? Does a good ESG score equate to being a good company? Number three, we’re going to talk about different types of greenwashing starting with compliance greenwashing.

Number four, we’re going to talk about competence greenwashing: Kim’s term. And finally, we’re going to talk about financial greenwashing. Once we’re done with that, we will also solicit Kim’s views on whether he’s experienced greenwashing personally and what to do when you do encounter it. Without further ado, let’s jump into the questions. So we’re going to start with the question, Kim, in your words, what is greenwashing?

Kim Schumacher: Greenwashing in the most simple terms is merely the fact of, advertising or making claims about a product or service. And that claim basically implies that it has environmental or sustainability-related benefits or it reduces, for example, negative impacts or it has positive impacts or downplays, for example, the negative impact. So it’s basically making environmental sustainability-related claims. With a product or service that is not backed up by evidence or data.

What Makes a Company Good?

Ravi Chidambaram: That’s very crisp and concise. Thank you for that, Kim. And that sets the stage. So let’s move on to greenwashing. In a corporate context, companies often make claims about being good in the sustainability area. As you mentioned, it could be for a product, it could be for service. In your opinion, what makes a company good?

Kim Schumacher: I think what makes a company good is primarily transparency, because we always talk about good management or we talk about, for example, lean supply chains. But I think What makes a company good is transparency because ultimately what a company is, and what a company sells is ultimately a contract and it’s based on a promise. It’s based on a claim. It’s based on expectations that are generated. And that is usually backed up by evidence or by resources.

Of course, when it’s a service, there’s not a hundred percent guarantee that the service will live up to exactly what has been promised in the beginning. But if you sell a very positive image, for example, in terms of environment or sustainability, then you also need to invest the necessary resources that at least you could achieve.

To the best possible outcome. And that is usually, how do you do that? By being transparent. What are your resources? What are your capacities? Provide the evidence, provide the data, and then it allow the customer or the client to make their own choice.

If you, for example, offer bad products or services and you try to hide it and you try to present yourselves in a better light than it actually is, then I think, we get into the territory where you become a bad company because you stop being honest about what it is that you can actually do. And you try also to basically be better versus your competitors. And that is where I think what separates a good company from a bad company is transparency and credibility.

Ravi Chidambaram: That’s an excellent definition. Let me just paraphrase that. So in a way, you’re saying every company has a social licence to operate. That licence is with a variety of stakeholders that impacts customers, suppliers, investors, and so on. And what you’re saying is the more transparent a company is in engaging with stakeholders to provide information about its products, services, and activities, whether good or bad, or whether on a journey to get better and the resources needed for that journey.

Then in a way, they’re fulfilling their expectations for that social licence. Would that be a good way of thinking about it? Okay. That’s very good because I teach a class at university called The Good Company, and we always philosophise and debate about what a good company constitutes. I think I will bring this perspective into my class again.

Thank you for that. Now continuing on the theme of good company, Kim. A lot of rating agencies have popped up over the past five, to 10 years to rate companies on their ESG performance. Of course, some of these methods are subjective, controversial, and not complete. But nevertheless, they’ve grown in popularity and many stakeholders Look at these rating agencies for guidance about whether companies are good in your esteemed view. Is a company with a high ESG score from, say, multiple rating agencies a good company because they have a good score?

Does Good Score Make a Good Company?

Kim Schumacher: That is a very loaded question and highly complex. However, to give you the most condensed answer, that is also I think very useful to the listeners. It depends. It depends on multiple factors and those factors that are most important are the underlying data. Because any ESG rating is always just as good as the underlying data.

And there’s a lot of discussion around differences between the different ESG ratings that a company might get. So for example, you have, especially technology companies, or Tesla is a good example. That might score very well with one rating agency and very badly with another rating agency or for example, Facebook Meta.

So you have a lot of different companies that get very different ratings depending on what rating agency or ESG rating agency you look at. And then what separates really a good rating from a bad rating is the underlying data. First of all, the quantity is very important. How much access to raw data does any agency have?

And there we have a lot of problems in terms of, especially the further we go into the supply chain, the less data is available and then we just work with a lot of assumptions or a lot of rating agencies work just with assumptions. To try to fill those gaps. And then also in terms of quality, it’s not only quantity, but the quality of the data is extremely important because there are different reporting standards.

Some companies are very vague in what they report, especially smaller ones or from developing countries, but that is often very crucial to the supply chain. And with that being said I think that is influencers ratings to such a large extent that it’s very hard to say is an ESG rating that a company has the end of all.

And there are those who make genuine efforts to get better data, to get more quality data to go further down the rabbit hole. This huge gap of supply chain level data gaps to fill those. Once you have access to that, I think then we also get a more faithful representation of a company’s sustainability performance.

But in the meantime, I would say be very cautious and look also very closely at the methodology that is being utilised because you will sometimes see very large differences between different rating agencies for the same company.

Ravi Chidambaram: So just to summarise your thoughts on that. Maybe there’s too much of a misguided focus on the end product, the score in determining whether a company is good or not, and not enough on actually how that score is derived. One as a user of ratings should study more the quality, quantity, and transparency of the data. And then see what methodologies are used and basically only in cases where the data meets all those criteria where you can maybe trust the scoring a little bit more.

Kim Schumacher: Yes.

Ravi Chidambaram: Okay. Thank you for that. Dear listeners, I hope you’re enjoying our podcast with Dr. Kim Schumacher today on greenwashing at ESG MythBusters.

It’s great to have you all and we look forward to your comments. And engagement on this very exciting episode. Kim, we’ll continue now on different types of greenwashing. It’s a fascinating subject in that greenwashing spans so many different aspects of the corporate landscape.

Let’s touch on a few. Let’s start with compliance greenwashing. This 150-page report is based on GRI. TCFD suggests that this company takes sustainability very seriously, very thoroughly, and therefore should be trusted in terms of its claims around sustainability.

Sustainability Reporting

Kim Schumacher: So I do think that companies that do sustainability reporting are better than not do sustainability reporting. So I want to be very clear about that. However, it always, and that is with Compliance Greenwashing is for what reasons do they do that? Is it because they generally wanna give a better representation of their efforts, both the challenges that they also encounter, because the sustainability journey is not a straightforward one because, for example, decarbonization or.

More efficient use of natural resources or social factors in the workforce, for example. Those are all things that don’t improve overnight because let’s be just very honest, a lot of companies, a lot of sectors, a lot of industries are not sustainable at this moment in time. Of course, there are pathways to becoming more sustainable, but those are journeys that do not necessarily present themselves without challenges.

And then it comes to, again, the element of transparency, because if a sustainability report just becomes another form of marketing or communication where you just want to present. The best side of your company and try to omit or downplay the negatives or the challenges. Then we are getting into the territory of compliance greenwashing because ultimately it just becomes a box-ticking exercise where you say that is currently needed.

That is everyone else does it, or in some countries, in some jurisdictions, it is actually required by law. The EU is a good example, but you’re just trying to fill the minimum necessary. You put in some nice pictures, you sponsor maybe a few social events, and then you call it a day. And that is very disingenuous and that basically also affects credibility because ultimately more and more people become aware of that. Necessarily a good sustainability report in terms of appearance does not necessarily mean good sustainability performance in terms of impact.

Ravi Chidambaram: Excellent. And you touched on the area of impact and I want to transition up to the next area of greenwashing, which I’ll call impact greenwashing. A lot of companies want to convey. Their compliance with the UNSDGs and are now even beginning to quantify the impact that their products services and good deeds have on their stakeholders and even publish separate impact reports.

They are sometimes included with integrated accounts and even signal to markets that the companies should be valued differently or higher because of their impact. This is a controversial yet also necessary area in ESG. I’d like to have your thoughts on this whole impact greenwashing field.

Impact of Greenwashing

Kim Schumacher: First of all, I do think there’s value in the underlying notion that those that have a positive impact should be viewed in a different light. But what is important is that the impact is measurable. It is being reported, and it is verifiable, and it is also being verified. Those are three extremely important points because just claiming to have an impact and just presenting your results that are not independently assessed.

Then we get into the area of impact washing or impact greenwashing, where you make claims that are sometimes hard to verify are not verified at all, or are not independently verified. And then you claim that you have that positive impact that you claim to have Should also be taken into account in the company’s valuation or other for example tax burden, things like that.

That is problematic in my opinion. However, there are currently, unfortunately, just as a lot of negative externalities that are not accounted for, such as, for example, pollution, and greenhouse gas emissions still to a large extent, and have no monetary value at this point apart from maybe voluntary carbon markets and some compliance markets. But, Just as negative externalities are currently not necessarily sufficiently financially taken into account, positive externalities are also not sufficiently taken into account.

If a company has a demonstrable positive impact, that should also be taken into account. However, how and in what ways, is still up for debate because. Again, how to measure impact how to quantify impact, and especially how to verify impact are things that are still not resolved. So I do think right now we should be cautious because what constitutes a positive impact especially short-term impact versus long-term impact is also an important question that needs to be solved.

Ravi Chidambaram: Understand, thanks for that. Let’s carry on. I want to touch on this whole area of financial greenwashing, for lack of a better term. At RIMM we did a really interesting study. We looked at 15 Fortune 500 companies that are major parts of the MSCI ESG indices globally. And we did a simple exercise. We looked at their stated financial goals for 2023, profit growth, sales growth, and so on, and we looked at their ESG goals for 2023.

We found that in the majority of cases, a company’s ESG goals, IEAGHG, raw emissions reductions, material use reductions, water consumption reductions, and so on. Often are not compatible at all with the financial goals and targets that they seek. IE output growth through new factories.

That leads to revenue growth new product line launches and so on. To me, it seems that ESG departments, CSR departments financial departments, and the C-Suite don’t really talk to each other about integrating it. So are we really looking at a kind of financial greenwashing scenario here, on the part of a lot of big companies?

Financial Greenwashing

Kim Schumacher: That is a very good question, and I do think recent trends and recent developments have shown us a reckoning across the financial sector. Because there were all those initiatives. For example, the Climate Action 100, the Net Zero Assets owners Alliance, all those under the United Nations kind of umbrella the United Nations.

UNEP FI, United Nations Environmental Program Financial Initiative, created a bunch of initiatives for different types of stakeholders in the financial sector, be it from asset owners to asset managers to insurers. Everyone was covered and initially, there was a lot of Enthusiasm for joining those and declaring.

Another one is the principles for responsible banking. Everyone wanted to join in, as a universal investor, a universal institution, in what sectors do we invest?

And we also have kind of revenue expectations, profit expectations. We need to pay out dividends and their shareholder expectations. And those sometimes clash with the sectors that we are supposed to either divest from or reduce our investments from or that we are supposed to engage with to reduce carbon emissions.

But ultimately, those sectors, one of the key elements why those sectors are profitable is the lack of accountability towards externalities. For example, one good example is aviation. Another one is shipping.

And with that, financial institutions find themselves in a bind because there are only very few sectors and only very few companies. That are genuinely sustainable in the sense one would be, and of course, I’m saying that with reservation would be the renewable energy sector, but one of the main criticisms is that there are simply not enough projects in the pipeline to have all that money flow into the renewable energy sector because there’s a lot of opposition towards the construction of new

onshore wind farms people, there’s a lot of other concerns such as grid stability, and that is what financial institutions say. And then also, on the other hand, the sectors that are highly profitable are sometimes the most polluting ones or the most unsustainable ones. And those usually constitute the baseline for returns.

And if you talk to an asset manager and you tell them, Hey, you need to reduce 80% of your investment universe. To be aligned with our sustainability or our ESG expectations, they will be, yeah. So how do I make money at the end of the day? And that is this clash, this kind of reckoning that to be sustainable or ESG aligned.

That would also mean acknowledging the fact that maybe revenue or return on investment expectations also need to be aligned. At least in the short term because what we see, and for me as someone who studied environmental science, what we see also this year is that climate change starts to have more and more very concrete impacts on global economies.

And if we don’t do that, some sectors will. Be affected and some sectors might even disappear over the long term. For example, winter sports are probably the most tangible ones. And with that, I think some investors now start to acknowledge we need to also have another way of assessing risk and assessing opportunities.

But until that actually. Translates into concrete strategies and less pushback from current fund managers or so until that happens, we will see this dual line, which then leads to greenwashing where you have products that want to appear green, but you still have a bunch of fossil fuel companies in it, or you still have a bunch of.

Agricultural companies still might lead to deforestation because those are, unfortunately, those that generate the profits because the negative externalities are currently not being financially internalised.

Ravi Chidambaram: No, that’s a very fascinating take. You’re saying companies in some way are almost being forced into greenwashing. Financial greenwashing because they have to walk this tightrope between satisfying investors on the one hand with traditional returns through growth and profitability and new stakeholders on the other hand, like consumers, regulators, and so on who are demanding more accountability on how externalities are used and managed.

So in a way, it’s almost the system Let me close off our discussion on greenwashing by talking about your favourite area of competence greenwashing. Can you please tell our listeners what competence greenwashing means, in the current corporate context? Why is it problematic and what can be done about it?

Why is Competence Greenwashing Problematic?

Kim Schumacher: So competence greenwashing in its most simple form is the misrepresentation of sustainability or ESG-related skills by individuals or by organisations. And that is in its most simple form and often it is to look better in terms of the capacities that they have, the resources that they have, the skills that they have, the expertise that they have.

And why do they do that? Because of multiple factors. If everyone else around you acquires a certain skill and that skill is now needed, then you also think you need to acquire that skill in order to keep up with everyone else, and if it is difficult to achieve that. But currently, no one is really regulating how it is being assessed.

Then it is of course very easy to just pretend that you have that skill as well. And because currently, no one is really looking, at what actually constitutes sustainability expertise. What constitutes ESG expertise? Everyone now is claiming to be an ESG expert. Just like during the pandemic, everyone claimed to be a virologist.

We suddenly had 7 billion virologists. The thing is, it takes time to become an expert in anything, but a lot of the people who work inside more traditional organisations are not traditionally trained sustainability professionals.

They now just take the very easy, quick route by doing a quick one-day online course and then basically afterward claim to be a sustainability expert. Or not even that, they just, what I see a lot of in LinkedIn is now sustainability enthusiast is one of the words that I see a lot, or climate enthusiast, or environmental enthusiast.

It’s like these terms. Give this yeah, green halo, but on the other hand means nothing in terms of me being able to assess do you actually have what it takes. And that is this weird space where even the recruiters, even the organisations do not really know what they’re actually looking for because everyone just wants to somehow demonstrate.

That they are more sustainable than they were yesterday, that they’re more sustainable today than they were yesterday. So what are some of the strategies that we see is that they just rename existing jobs. Just, an analyst becomes an ESG analyst, or a ‘Head of CSR’ becomes ‘Head of ESG’. So basically just overnight.

Bamm, we have now a bunch of sustainability experts, which we can also then put into our sustainability report. So anyone can just now claim to be a sustainability expert based on some vague factors, but, and that is where I changed. This notion, and I brought it down also to this element of materiality. It is, what my question was, and how did I come up with that? Is the skill that you claim to have material to what is, what needs to be done?

For example, if I’m a doctor, if I’m a surgeon and I work in a hospital, then I should be able to, for example, if I’m a neurosurgeon, Then a skill that I should have is I should know where the brain is in terms of anatomy. I should know how to hold a knife. I should know all these things.

So we have a lot of people who have, for example, climate experts or sustainability experts or biodiversity experts even in large financial institutions. And then you look at the track records and you see no indication. Of any prior exposure to biodiversity that goes beyond maybe looking at ‘Planet Earth’ on BBC.

So that is, and then I am supposed, as a client or as a customer, I’m supposed to trust these people to manage my biodiversity fund.

And for example, if I’m managing a biodiversity fund and someone is handing me a bunch of biodiversity data and I have no idea, I have no prior exposure to that, how would I even know? If anything is wrong or right, that is extremely important.

And there I will finish up now. There’s this notion by Malcolm Gladwell who said that it takes 10,000 hours to become a world-leading expert in anything. And I’m not saying you need 10,000 hours in any area because it all always depends on materiality, what you claim to be able to do, and what you actually have.

And I don’t want to dissuade anyone from yeah, becoming more knowledgeable on sustainability or ESG, but enthusiasm motivation, awareness, or passion for ESG and sustainability does not equal subject matter expertise. And that is what a lot of people nowadays mistake. They say, oh, I can just, if I have enough motivation, I can just do anything if I just set my mind to it.

No, an expert does not just simply become an expert because you have the motivation to do it takes time, it takes exposure, and I. The problem with that is the financial sector now wants to rebrand itself as sustainable, and a lot of people are now presenting themselves or rebranding themselves as sustainability, biodiversity, climate, and ESG experts.

But what it also does, is it prevents the sector from really transitioning towards sustainability because what is needed is genuine expertise towards what are you actually working towards too. And if that is, for example, decarbonization or if that is, for example, reducing biodiversity loss, Of how you are operating right now because if you don’t do that, you will never become sustainable.

The only thing you can hope for is maybe becoming a little bit less unsustainable, but you’re not really creating the systems change that is required or that you claim towards your clients and your customers to have.

Ravi Chidambaram: No, thank you, Kim, for that very passionate answer. As the founder of the competence greenwashing term and movement, I can see that you have a very strong view of what that is. Maybe this is the most vexing of all the greenwashing areas because it’s so difficult to solve in any reasonable way.

The reality is companies need to change their hiring practices and find experts who are not typical corporate people. Sustainability is a very diversified field. And it’s not easy for any organisation to do it. But that said, it also sounds like to me IT companies are taking a lot of shortcuts, rebranding, relabeling, and not addressing it thoroughly enough, although it’s challenging. So thank you for that.

Kim Schumacher: Can I just make a final note for you as RIMM sustainability as an E S G data provider, currently no rating agency is actually doing that. I think in the future, also look at the expertise and looking at the organisational structure in and of itself from the board level, but also to those inside of the organisation who were supposed to be key personnel fostering the transition.

If we look more closely at those, I think that would also be a good way to adjust ESG ratings and have a more faithful representation of what not only a company is doing, but what it is actually capable of doing, and if it can ever live up to what it is claiming to be able to do.

Ravi Chidambaram: No, that’s a great insight. And that’s good advice for us at RIMM. And something we should continue discussing. We wanna wrap up soon, but I just want to leave. I want to leave my listeners. I. With final advice from you. If one encounters instances of greenwashing in your personal life as a consumer or indeed if you’re a regulator who has to regulate these kinds of issues, how would you approach this issue and what suggestions could you make?

How Would A Regulator Approach This Issue?

Kim Schumacher: I think the times always require solutions that correspond to the times where Anyone lives. So it’s always that contemporary solutions are needed. Since we live in a very connected time via social media, technology, via digitization. I think one of the most potent ways to also indirectly provide data to anyone like large search engines or ESG rating providers is for example, Documenting the greenwashing that you encounter in your daily lives.

For example, posting it on any social media platform of your choice and calling it out. For example, posting on Instagram, a picture when you see it in the supermarket. Hey, there’s another product that claims to be super green or carbon neutral without really providing any additional information or it uses another term like all-natural or biodegradable or things like that, calling them out.

Because even if in the smaller picture, it might not have a large impact, what you indirectly do is, and with AI and all those tools nowadays at our disposal, you provide a vast repository of existing cases, mini-cases where it has been documented that could constitute greenwashing.

Ravi Chidambaram: No, thank you. That’s excellent advice I think for our listeners, Kim, and a powerful tool to combat greenwashing. Let me wrap up. I think on ESG MythBusters as the name suggests, we are here to deconstruct various false narratives in the ESG area. And a lot of those are really summed up beautifully under greenwashing, which is why I thought it was critical to kick off our first episode with Greenwashing and have Kim as our guest because he’s one of the most qualified, I think, to examine the hard data in front of us and call out instances of greenwashing.

Whether it’s competence, greenwashing, or financial or impact greenwashing? I think it’s fair to say that there are two types of issues in greenwashing today. There are errors of commission and errors of omission. I think errors of commission are the willful cases where companies misrepresent their true levels of addressing various ESG externalities and dealing with them in a transparent way.

I think Kim has touched on many of these very well. But I think Kim has also rightfully pointed out, that companies have to also be given the benefit of the doubt to some extent.

Stakeholders also have to have some understanding that there are errors of omission that today, the levels of data the methodologies used. In general, the level of information needed to truly assess companies’ performance on ESG still needs to be improved. That’s what companies like we’re doing at Rim, where we’re constantly trying to improve the analytics and the data that we can provide to stakeholders to make better judgments about a company’s ESG performance.

So in that sense, combined with the difficult system, Of shareholder capitalism we operated with the drumbeat of quarterly earnings and profitability. And on that treadmill, it’s very difficult to hold companies a hundred percent to account.

So with that let me wrap up and say thank you so much for joining us, Kim and our dear listeners, in busting some ESG myths. We hope you’ve gained some good insights and found some new perspectives and knowledge.

Kim, fantastic insights and feedback and I’m sure there’ll be a lot of great feedback from our listeners. Please keep the comments coming. Please keep your ratings coming and hope you enjoyed the episode today and look forward to seeing you in two weeks time. Thank you, Kim. And thank you, listeners.

Kim Schumacher: Thank you again for having me.

Our Guest: Professor Kim Schumacher

Prof. Schumacher is an Associate Professor in Sustainable Finance and ESG at Kyushu University (Japan). He is also a Visiting Lecturer at the Tokyo Institute of Technology (Japan). In addition, he is an Honorary Research Associate at the University of Oxford (UK).

His research focuses on ESG data and impact metrics, sustainability reporting, greenwashing, green bonds, natural capital, nature-based carbon offsets, biodiversity and ecosystem services, renewable energy project development, and TCFD/TNFD disclosures.