Here’s How to Tell Green Good Deeds From Greenwashing
(Bloomberg) -- Corporations are growing more interested in proclaiming how green they are, on everything from their packaging to their fund raising. Companies have been selling record sums of green bonds and other forms of ethical debt, with some tied to their social and governance behavior as well as environmental actions. Faced with a flood of self-congratulatory announcements, it can be hard to figure out what’s really green or sustainable, and what’s “greenwashing” -- the use of misleading labels or advertising to create an undeserved image of environmental and ethical responsibility. Here are some questions that can help you sort through what’s meaningful and what’s not.
1. How ambitious are a company’s goals?
If a company’s goal is just a minor improvement over their previous goal, it might be greenwashing. But as companies grow more competitive about their environmental credentials, more are looking to be “net zero,” or carbon neutral, by 2050, a target scientists say is broadly necessary to avoid locking in catastrophe. Hundreds of companies have set science-based targets aimed at keeping their operations in line with the Paris Agreement’s commitment to keep global warming limited to at most 2 degrees Celsius. And an increasing number are investing in carbon removal projects as well -- such as Microsoft Corp.’s pledge to erase its historical emissions and Salesforce.com Inc.’s plans to plant a trillion trees.
2. How specific is the timeframe?
Sustainability announcements should include short- and long-term time frames. Pilot programs should include discussions about the specific steps that might be needed to scale them up.
3. Are companies looking at the full ‘scope’ of their emissions?
Sometimes companies only tell part of the story. Under international standards, Scope 1 emissions just reflect the emissions caused by a company’s own operations. Scope 2 represents the emissions that come from purchased energy, like electricity. The biggest number often comes in Scope 3 emissions -- those produced by a customer’s customers and suppliers. For an oil company, for instance, Scope 3 could include 90% of its total emissions.
4. How much do promises rely on ‘offsets’?
Buying credits from forestry or other projects that absorb carbon to offset emissions can sound like a great idea, but opens up lots of complexity: What happens if trees planted to generate CO₂ credits die or are cut down? Do companies have to give up their credits? Carbon offsets by themselves are almost never a substitute for absolute emission cuts. That is why many regulatory programs cap companies’ use of offsets at a single-digit percentage of their total cuts.
5. How true are the clean energy claims?
Energy attribute certificates (EACs) are commonly used to certify clean energy globally. However, the tanking of certificate values, coupled with the absence of standardized, transparent markets, means many are questioning their validity and efficacy in driving the decarbonization of the power sector, wrote BloombergNEF. The oversupply of EACs has pushed prices to such low levels in some markets that ‘100% renewable’ claims can be easily made without developing new projects.
6. What about the social and governance goals?
Social and governance aspects have grown to be just as crucial as companies’ environmental efforts, especially with the MeToo and Black Lives Matter movements that affect consumers’ behavioral spending. Many corporations are using their annual sustainability reports to showcase how fair they are in equality employment or what they did to improve employee wellbeing. Given some of these goals are not measurable, there’s a risk in overstating the results. BlackRock Inc., for example, settled a discrimination lawsuit in July 2021. Ironically, the U.S. firm had months earlier tied its borrowing costs to targets that included the number of women in leadership roles, and the number of Black, African American, Hispanic and Latino staff it employs.
7. Is there any way to check on claims?
Yes and no. Third-party rating companies such as ISS-Oekom, Sustainalytics and Vigeo Eiris can provide some assurance that green bonds are doing what they say they are. All of this greenwashing detective work would be easier if investors and the public had a standardized approach and robust set of data to compare. Private ratings systems can be unreliable and corporate reporting is spotty and hard to compare. The European Union has proposed a European Green Bond Standard, which could be applied to other type of ethical debt such as sustainability-linked issues or social financing, laying out a clear methodology and disclosure requirements for environmental, social and governance (ESG) analysis or rating providers. The guideline, though voluntary, could encourage consistency in disclosures of ESG metrics. Financial bodies also regularly update ESG debt principles to keep up with market changes to avoid risk of greenwashing. Global loan associations, for example, amended their sustainability-linked loan principles in May 2021 to make it compulsory for ESG targets to be verified by an independent arbiter.The U.K. has introduced a “Green Taxonomy” to define the requirements for financial investments to be deemed environmentally sustainable.
8. Is everyone really disclosing everything?
Even with market guidelines and third-party reviewers, many are still questioning whether companies are disclosing enough information to justify the ESG rating or claims they make. Many companies have tied their borrowing costs to ESG targets, for instance, but the private nature of the loan market allows them to hide their performance results from public eye. And it is not mandatory for borrowers to reveal the loan terms so there is no way of knowing the effect of their ESG efforts on the planet or how aggressive their targets were in the first place.
The Reference Shelf
- The EU’s Q&A on its European Green Bonds Regulation.
- Global loan associations’ Sustainability Linked Loan Principles and Green Loan Principles.
- International Capital Market Association’s guide on Sustainability-Linked Bond Principles and Green Bond Principles.
- QuickTakes on various types of ESG debt, the explosion of green bonds, and sustainability-linked loans, the confusion over ESG ratings, and emissions “scopes.”
- The Science Based Targets initiative works to encourage corporations to create and carry out plans for carbon reductions.
©2021 Bloomberg L.P.