Companies often cover up greenwashing with misleading language, vague certifications and superficial actions. Cape Capital’s Impact Investment Specialist Alexandre Micheloud on separating true sustainability efforts from empty promises.
Almost ten years ago, I took the trip of a lifetime through Southeast Asia. Much of what I saw was breathtaking: the white sands of Halong Bay, lush jungle canopies in Indonesia. But some sights were more jarring. Pristine beaches were littered with plastic bottles, and rubbish bags hung from rainforest trees. According to Our World in Data, Asia still accounts for 80% of the plastic refuse that washes up in the ocean. All too often, mismanaged waste finds a direct path to the sea through its vast river networks. The scale of the problem had a visceral impact on me, and since then I have dedicated my career to solving global environmental challenges, which in the last few years has meant helping clients align their capital with purpose. But distinguishing genuine green impact from surface-level change can be frustratingly difficult.
Under the cover of greenwashing
There have been some well-publicised cases of outright deception. In 2015, Volkswagen was charged with cheating emissions tests, in a scandal that cost the firm $35bn in fines. This was fortunately an extreme case, but subtle misrepresentation is far more common. Some purportedly sustainable funds load up on tech companies, which have relatively low carbon footprints due to their “dematerialised” operations. This might satisfy sustainability guidelines on paper, but delivers limited real-world environmental benefits. Investors can be disappointed to find that their ‘green’ investments have actually had very little tangible impact on climate change.
The same ambiguity can be found in the ‘environmentally friendly’ products that we use on a day-to-day basis. On a recent ride in my father’s car, I noticed it had a ‘green’ mode. This sounded virtuous, but on closer inspection, promised no concrete reduction in emissions or efficiency gains. We see similar problems with labels like ‘organic,’ ‘eco’ and ‘ethical’ – vague terms that often have different connotations in different territories. Certifications can be another trap, and only carry weight if the accrediting body has real clout.
Cherry picking data
Firms can also cherry pick data when it comes to emissions reports. Companies classify their emissions under three categories. Scope 1 emissions are greenhouse gasses that an organisation emits from its operations, while Scope 2 derive from its energy consumption. Scope 3 emissions arise from activity across the firm’s value chain, both upstream and down. This can include the embedded emissions in the materials purchased from suppliers and the emissions resulting from consumers using the end product.
Scope 3 emissions often make the biggest contribution to a firm’s overall carbon footprint, but are frequently underreported or ignored. An oil company might boast of a 5% reduction in its Scope 1 emissions through more efficient drilling. This sounds impressive, until you realise that Scope 3 emissions (arising from the actual oil consumption, which can represent over 80% of its total) remain unchanged.
A tougher backdrop
It might be tempting to think that appetite for sustainable investing is waning, especially now that the economic backdrop is less benign. Back in 2022, higher interest rates dented earnings forecasts, creating headwinds for tech-heavy ESG funds and alternative funds. At the same time, consumer cutbacks have weighed on sales for sustainability-focused firms. Yet the case for genuine ESG is robust. Climate change exposes firms to transition risks from regulatory shifts, carbon taxes and reputational issues. Scientists also anticipate more frequent extreme weather events, with summer wildfires across Europe a grim reminder of what is at stake.
In this context, sustainability isn’t just about doing good – it’s about building resilience for the future.
Higher temperatures are associated with lower worker productivity, and institutions such as the European Central Bank and the Financial Stability Board warns that climate change could increase inflationary pressure over the next 10 years. They are also alert to financial stability risks associated with climate and biodiversity-related losses in the financial system. In this context, sustainability isn’t just about doing good – it’s about building resilience for the future.
Enforcing high standards
How do we distinguish greenwashing from truly purposeful change? Evidence that a company is meeting environmental targets is a good sign – but not all frameworks are equal. As any Swiss person might know, Minergie standards for reducing emissions and energy use in renovated buildings are famously stringent. By contrast, frameworks like the Science Based Targets Initiative (SBTI) guidance on greenhouse gas emissions are far less rigid.
Third-party verification is also important: the best accreditations are scrutinised by experts in the industry and rigorously audited. Benchmarking against peers is also a good sign. Given that Environmental, Social and Governance (ESG) helps firms to stay competitive in a changing world, industry leaders should face lower reputational risks. Companies investing in change today will likely be more agile tomorrow.
Looking to the future
Analysing a firm’s historical data is important, but so is scrutinising its future pipelines. While hard to abate industries like cement production will remain vital in the future, they need to be adaptable in the face of growing regulatory pressure. Looking at research and development pathways can help us to spot which companies are best positioned to seize transition opportunities and grow their future market share.
Evolving AI technology can also help sharpen our view ahead. Natural language processing tools can detect vague or inconsistent language in company filings. AI models can track how a firm’s ESG language evolves over time, and screen for any controversies in the press. Satellite imagery is another valuable tool, allowing close range views of environmental damage and deforestation. This is especially useful in holding firms to account for upstream and downstream Scope 3 impacts that they might hope to overlook.
ESG as a strategic move
When sustainability is such an important risk management tool, cutting through greenwashing matters. In China for instance, a change in government policy in 2011 reshaped global solar panel supply chains, demand patterns, and pricing. The country is now a leader in the field, and accounts for over 80% of global production. This wasn’t a moral choice, but a strategic move for long-term success. While interest rate cycles and political terms are short-lived, climate risks need to be navigated over the long term.
Alexandre Micheloud
Impact Investment Specialist