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Greenwashing is becoming a big problem for ESG

As ESG continues to influence investment opportunities, greenwashing is slowly becoming a big problem globally. When first introduced nearly two decades ago, the aim of ESG was straightforward. It’s about prioritizing environmental, social, and governance standards when investments are made.

The environmental criteria refer to business practices and initiatives that are environmentally friendly while social refers to how the organization values its employees and governance refers to the amount of transparency the company has in its management.

Today ESG is becoming increasingly adopted and practiced by organizations around the globe. In fact, statistics showed that the most common method for ESG investing among global businesses in 2021 was ESG integration, whereby ESG issues are included in investment decisions.

For example, whenever a company invests today, ESG will be part of the decision-making process. If an investment opportunity is fruitful but may not be sustainable for the environment, chances are it will not attract high investment opportunities.

According to ESG Global Study 2022 by Harvard Law School Forum on Corporate Governance, Europe continues to lead the ESG charge. More European investors say ESG is central to their investment approach (31% vs. 18% in North America, 22% in Asia-Pacific).

Europe also boasts the highest percentage of ESG users (93% vs. 79% in North America, 88% in Asia-Pacific). This reflects the more mature European ESG market and regulatory framework. The North American region, by contrast, has the least conviction in ESG and the lowest percentage of ESG users.

However, increased ESG practices have led to concerns about greenwashing. Regulators in the European Union have now grown more worried about companies engaging in greenwashing or making exaggerated climate-friendly claims to attract investors.

Greenwashing is when the management team within an organization makes false, unsubstantiated, or outright misleading statements or claims about the sustainability of a product or a service, or even about business operations more broadly, as defined by the Corporate Finance Institute.

Over the years, many large and small enterprises have been guilty of greenwashing when it comes to ESG. Some of the most notable examples include a European carmaker admitting to cheating emissions tests by fitting various vehicles with a defective device. Another example was when a popular drink company said it would not abandon plastic bottles as it was popular with its customers.

Greenwashing in Southeast Asia

These are just some of the many greenwashing examples globally. Interestingly in Southeast Asia, greenwashing is also a problem but the practice of ESG by organizations here is still only in its early stages. In Malaysia for example, large enterprises like Petronas and Maxis have made several ESG announcements.

In an article in the New Straits Times, Mahadhir Aziz, CEO of Malaysia Digital Economic Corporation writes, “Without a doubt, ESG factors are having a greater influence on digital companies, from customer behavior to investor and stakeholder expectations, to reporting requirements.

However, many businesses still have a limited understanding of the positive impact of embracing sustainability on corporate performance and are hesitant to commit.”

Regulators in Indonesia, Vietnam, and Thailand have also voiced concerns about greenwashing as these emerging countries continue to expand and develop quickly.

In Singapore, the Monetary Authority of Singapore issued guidelines for funds that are sold to retail investors in Singapore under the label of meeting ESG standards. The Straits Times reported that the guidelines, which come into effect in 2023, will help to reduce greenwashing risks, as well as enable retail investors to better understand the ESG funds they invest in.

With that said, enterprises would need to ensure they are not taking everyone for a ride with false claims and greenwashing. Consumers themselves have shown that they are willing to spend more and support brands that practice more ESG. Hence, greenwashing should not be a shortcut for any large or small enterprise.