ESG-washing: how to recognize and manage it in a company

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The ESG criteria have assumed strategic importance in global investments, but there is an alarming risk of ESG-washing. This practice refers to the superficial adoption of ESG criteria, often for promotional rather than substantial purposes. This trend raises fundamental questions about the real effectiveness of corporate commitments to sustainability. The motivations driving companies to integrate ESG criteria into their operations must translate into a true sustainable transformation, manifesting in industrial changes, energy transition, and relationships with customers and partners.

ESG-washing implies presenting a company as more sustainable than it really is. It is not just a tactical approach but a trend influenced by market pressure and stakeholders, who demand an increasing commitment to sustainability. However, the results of corporate commitment with the integration of ESG objectives manifest in the long term. Moreover, as ESG investments aim to direct resources towards companies pursuing sustainable transformation projects, the failure to achieve real changes can compromise corporate credibility and brand reputation.

The consequences of ESG-washing, considering the emerging regulatory context (such as the EU regulation on ESG ratings), go beyond the loss of trust from consumers and investors. They can also lead to legal and regulatory penalties, given the interest of institutions and investors in ensuring transparency and accountability in sustainability statements. Specifically, the EU regulation requires ESG rating providers to obtain authorization from ESMA and be subject to its supervision. They must meet transparency obligations, particularly regarding the methodology used and sources of information. ESG rating providers located outside the European Union wishing to operate in the EU will need to get their ratings approved by an authorized provider in the EU, based on quantitative criteria, or be included in the EU ESG rating registry.

Investing in sustainability represents a creation of value in the medium to long term, as confirmed by 85% of managers surveyed in the study conducted by the Institute for Sustainable Investing. The study was conducted on over 300 public and private companies with revenues exceeding US$100 million. Among the main reasons, 50% indicate the generation of financial returns, surpassing 48% who mention compliance. 85% of companies believe that sustainability represents an opportunity for value creation. When asked about the impact of sustainability on their long-term corporate strategy, 85% of respondents said it is mainly (53%) or partially (32%) an opportunity to generate value. This aspect is also the most considered motivation by sustainability decision-makers to justify the adoption of a sustainable strategy in their company.

The expectations of external stakeholders, such as investors and civil society, have seen significantly lower responses. Value creation is particularly accentuated in the Asia-Pacific region, where 93% of respondents in China claim that sustainability for their company mainly focuses on value creation. This could reflect China's fundamental role in supporting expanding green industries such as renewable energy and electric vehicles. Two-thirds of companies in the energy sector consider sustainability an opportunity to generate value, while only the IT sector has a higher response rate (86%). However, if short-term economic returns remain the main motivation for ESG investments, there is a risk of amplifying unachievable expectations with forms of greenwashing or ESG-washing, extending the concept to social and governance dimensions.

In the report, only 26% of respondents indicate civil society pressure as a stimulus to invest in sustainability. Investor (32%) and supplier (34%) pressures are more influential, as well as government incentives (35%). Moreover, 46% of respondents consider sustainable choices as a challenge for the development model, while only 15% see them as risk management. The causes of ESG-washing are manifold, including the difficulties in implementing ESG strategies, given the high investment demands. For 31% of respondents, these demands represent a priority, while 28% experience a conflict between sustainable practices and financial objectives. Only 37% of respondents believe their board of directors possesses the necessary sustainability skills.

Finally, the cultural beliefs of management play a fundamental role: 47% of managers feel a moral duty to act responsibly towards people and the planet, while 46% consider sustainability an important challenge for the current development model. Only 15% of survey participants see investments in sustainability mainly as a way to prevent risks. Despite such difficulties, ESG investments maintain a competitive advantage but must face risks like ESG-washing, which can undermine investor confidence. To effectively tackle this situation, companies must ensure transparency and reliability in their sustainability projects and clearly highlight the opportunities arising from the transition to more sustainable practices.