The rollout of COVID-19 vaccines worldwide offers hope of a post-pandemic world where we can rebuild our lives, economy, and livelihoods. When we do so, we must rethink how we measure environmental, social, and corporate governance (ESG) to ensure a better future. Since COVID-19 hit, climate action has taken a back seat to pressing issues such as healthcare and financial wellbeing. But over the past year, cyclones ravaged Bangladesh, forest fires scorched Australia, and temperatures hit over 130 degrees in California. Despite the worldwide pandemic dominating headlines and public discourse, the effects of climate change were ever present – and Canadians noticed. According to a recent survey by the Canadian Centre for the Purpose of the Corporation, Canadians are still more concerned about climate change than both healthcare and the economy. Real change will require action from not only individuals, but businesses as well. One issue is the complexity around climate accounting, which lacks standardization and comparability, and is open to manipulation. Instead, addressing these concerns will require a set of clear, consistent guidelines to identify positive environmental performance.
Instead, addressing these concerns will require a set of clear, consistent guidelines to identify positive environmental performance.
ESG investing in particular has begun gathering steam. According to Deloitte, the share of global investors that have applied ESG criteria to at least a quarter of investment decisions has jumped from 48 per cent in 2017 to 75 per cent in 2019. Impact investing index funds have surpassed $250,000,000. A shift is occurring; no longer can corporations focus solely on financial gain; they must also be conscious of long-term environmental sustainability. Doing so will not only benefit the environment but will ensure sustainable value for their stakeholders over the long term. To do this, however, will require transparency, honesty, and accountability.
Greenwashing refers to organizations that portray themselves as greener than they are. This causes issues for investors and consumers alike as it becomes difficult to differentiate true change-makers from those who want to profit off of eco-minded individuals. One reason for the disconnect is the lack of regulation in how companies report and enforce their emission-reduction efforts. “As long as you don’t have robust methodologies there is no policing of what is qualifying as ESG investment,” says Dora Blanchet, team leader at European Securities and Markets Authority. An EU study into greenwashing found that 59% of claims lacked easily accessible evidence to support their claims – with 42% of the cases considered false or deceptive. Without proper guidelines in place, the door is left wide open for greenwashing. ESG risks are forward-looking, but the data to prove whether companies’ efforts are meaningful and successful can often only be judged in hindsight.
This causes issues for investors and consumers alike as it becomes difficult to differentiate true change-makers from those who want to profit off of eco-minded individuals.
Company environmental performance is often measured by future commitments, such as “net zero by 2050.” This can become problematic, as companies that emit substantial CO2 may still receive good ESG scores. Parnassus, the fourth largest ESG fund under assets, had 17.26% of their capital in companies such as Alphabet, Amazon and Apple. The issue, though, is that Amazon registered a carbon footprint of 51.17 million metric tons of CO2 last year (up 15% from 2019). While Amazon has high ESG performance, this still seems contradictory—why would an ESG giant like Parnassus invest in a company whose carbon emission numbers are rising? The answer lies two decades away—a commitment by Amazon to be carbon neutral by 2040. With forward looking commitments such as carbon neutrality at the forefront of climate targets, it’s crucial to look deeper into what that truly means.
While in a perfect world, corporations would simply reduce emissions to levels in line with targets that keep global warming of 1.5 °C above pre-industrial levels, this isn’t always possible. One solution is Voluntary Carbon Offsets (VCO). Instead of lowering emissions, corporations pay for others to reduce or absorb CO2 emissions to compensate for their own. VCO’s provide a cost-efficient method of offsetting emissions and a way to manage those emissions that cannot be reduced by innovation. While companies need to strive to lower their emissions, in the meantime, VCO’s can help meet short-term decarbonization goals. Furthermore, they can be used as a last step after a company has already minimized their carbon emissions. Mark Carney, UN special envoy for climate and former governor of the Bank of England, called VCO’s “an imperative” if the world is to achieve net zero emissions.
While in a perfect world, corporations would simply reduce emissions to levels in line with targets that keep global warming of 1.5 °C above pre-industrial levels, this isn’t always possible.
That said, VCOs can be seen as a form of greenwashing, and more of a distraction than a solution. Instead of taking responsibility for reducing CO2 emissions, VCOs allow companies to continue their unsustainable behaviour while shifting costs to the customer. EasyJet offers an offsetting service that offers customers a “carbon-neutral flight,” where the cost to plant 12 trees is added to the ticket price. This type of program not only allows EasyJet to avoid making any real emission reductions, but it also shifts the burden of VCOs onto the customer. Additionally, VCOs make emissions more palatable to otherwise eco-conscious customers by positioning EasyJet as a climate friendly company.
The other issue with the use of VCOs as opposed to direct reduction of emissions is that the effectiveness of these offsets is often overstated. Take tree planting, for example: A newly planted tree can take up to 20 years before actually capturing the CO2 promised by corporations, and even then, there is the risk they get wiped out by droughts, wildfires, disease and deforestation. When a tree dies prematurely, the carbon that has been trapped within it is released into the atmosphere. Stored carbon is simply not the same as carbon left underground to begin with.
Government regulators, corporations, and investors must work together to mitigate the growing risks of climate change before it is too late. The first step is establishing strict and comprehensive reporting, verification processes, and standards for both reduction of emissions and purchasing of offsets. Motivated investors targeting environmentally conscious companies is the first step, but clearer guidelines for what constitutes positive environmental performance are a necessity. Identifying benchmarks for a multitude of factors, comparing companies in the same sector, and external confirmation will be imperative for environmental sustainability. To make positive gains, we must first be informed. If not, we risk falling victim to greenwashing, and we will be unable to hold corporations accountable.