Corporate greenwashing is so 2020. But ESG isn’t

January 2020 probably marked the high point for corporate-driven environment, social and governance (ESG) initiatives. It seemed companies and corporate organisations around the globe were clamoring to get their ESG credentials dressed up for the world to see.

Nothing reflected this powerful ESG momentum more robustly than the Davos Manifesto 2020, produced by the World Economic Forum (WEF) for its annual elite get-together that year. (The WEF, which was also enjoying something of a peak in global adulation has suffered a similar waning of its authority.)

The manifesto was, like most WEF public declarations, grand sounding and ambitious. “A company is more than an economic unit generating wealth. It fulfills human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives.”

It was then down to the International Business Council to devise a generally accepted international framework for ESG reporting. This it did in collaboration with the four large accounting firms – Deloitte, EY, KPMG and PwC. It was all go.

If there was any doubt about business’s commitment to ESG, billionaire Larry Fink, chair and CEO of BlackRock, the largest money-management firm in the world, made clear its centrality in his annual letters. In 2019, Fink’s letter to the thousands of companies in which BlackRock is invested argued that companies should embrace a core purpose beyond profit to achieve long-term success. He urged leaders to take proactive roles in societal issues, such as environmental sustainability and worker development.

Gone to ground

A mere six years later and everything has changed. ESG issues have hardly been mentioned in Fink’s last two letters. The focus of his recently posted letter was on the importance of getting into the market, investing whatever money you can – large or small.

The audit firms have gone to ground and the WEF, itself under existential strain, has relegated ESG to a less prominent spot.

And it’s all thanks to one man.

There’s no doubt Donald Trump has had a remarkably chilling effect on corporate ESG initiatives, which is understandable given the federal crackdown on ESG and related initiatives. There’s also the denuding of robust individuals from key regulatory institutions such as the Securities and Exchange Commission and the Federal Trade Commission.

The chill has been felt across the globe, which is understandable given that the corporate world takes its lead from the US.

Firms such as Starbucks, Mastercard and Procter & Gamble have weakened or reversed policies that linked executive pay to ESG progress. In the US, shareholders are submitting considerably fewer ESG-related resolutions. US banks have abandoned the Net-Zero Banking Alliance, which obliged banks to target zero emissions by 2050. This caused a similar UN-backed programme to fold.

And it’s hardly a coincidence that Apple and Microsoft have retreated from public climate advocacy in the years since Trump took centre stage.

All in all, it seems we have returned to Milton Friedman’s world of the 70s, where the sole responsibility of business was to increase profits.

There was much mourning.

But not everywhere.

Letting government off the hook

Writing in a recent edition of Foreign Affairs, Diane Coyle, professor of public policy at the University of Cambridge, expresses relief at the change. She reckons it was all a bit of a distraction, with ESG puffery being used largely to promote corporates with little or no benefit for the environment, society or governance.

The corporate ESG trend perpetuated, or even amplified, the fiction that corporations are the most effective driver of societal change, writes Coyle. They were letting governments off the hook. “By making companies responsible for adopting business practices that could address climate change, poverty and inequality, major market economies avoided undertaking the kinds of government interventions that could really solve these problems.”

It seems to Coyle that ESG-infused companies had been trying to sell the message that they could save the world. “They rushed to adopt (often voluntary) standards for reporting their environmental, social and governmental impacts, disclosing metrics such as their carbon footprint or the diversity of their boards …” Which is all well and good but, says Coyle, this ESG trend mostly enabled business as usual with few real constraints.

“The sheer speed with which so many corporations have discarded ESG reporting suggests that such measures simply often amounted to greenwashing – deceptive claims exaggerating companies’ sustainability – which is a useful revelation of companies’ true motives,” says Coyle.

It’s hardly surprising then that the problems targeted by the ESG initiatives have not gone away. As Coyle sees it, they won’t go away until governments “abandon their 50-year reflexive deference to big business”. This deference has seen them fail to enact the necessarily tough competition policies that ensure markets work for consumers rather than shareholders; enforcing regulations to clean up pollution and emissions; imposing corporate governance frameworks that will rein in excess executive remuneration.

Better disclosure

It is a grim situation but not everyone is as critical as Coyle. “I don’t think anyone ever thought voluntary enforcement was going to save the world,” one leading shareholder activist tells Currency. She agrees there has been a lot of greenwashing and that government regulation is probably the only way to get companies to change their behaviour. But importantly, what has been achieved is that companies are now producing detailed metrics of their impact on the environment, so not only shareholders but governments can see what is happening.

She believes that in South Africa, disclosure of the wage gap has played a role in recent increases in minimum wages at the big retail groups.

However, there’s no getting away from the deference challenge identified by Coyle. In many cases governments are rendered almost impotent by corporates that frequently, albeit sometimes subtly, threaten to pull investment or cut jobs if environmental or social regulations are proposed.

On the bright side, it might be that the expected backlash against Trump and his compliant corporate stooges will strengthen the resolve of future US governments. Or not.

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