As investors focus more on sustainable investing, some companies are tempted to oversell their environmental, social and governance (ESG) credentials.
Fidelity International’s ESG Analyst Survey 2021 reveals that, while many companies report their ESG activities accurately, significant numbers continue to overpromote their ESG performance. To get a true picture of each company’s sustainability credentials, corporates and investors must adopt a consistent global standard of ESG definitions and characteristics. Several are in development, but none has yet been universally accepted; this must change.
ESG promotion varies across regions
In our first survey focused on sustainability, we asked analysts: “What do you think about your companies’ efforts to promote their ESG credentials relative to their actions?” and gave them a scale of possible answers to capture whether companies tend to over or underpromote their efforts.
Overpromotion of ESG is often dubbed ‘greenwashing’ (i.e. when a company gives a misleading impression that its activities are environmentally sound). While the analysts reported some instances of this, as quoted above, their responses show they had a much broader set of behaviours in mind, including general differences in reporting approaches across regions, sectors and individual companies.
North America has the highest proportion of Fidelity analysts reporting that companies tend to present their ESG efforts in the best possible light. According to one IT sector analyst, this manifests as “glossy ESG reports which cite large percentage changes in environmental metrics without giving context on whether they are material.”
Some large US corporates have made ambitious statements that may take time to realise; for example, the US Business Roundtable commitment on corporate purpose made in 2019 or the big net zero pledges made in the last 12 months. However, the US government is expected to push for standardised ESG regulation, which should lead to more accurate reporting, especially in relation to carbon emissions.
More surprising perhaps is that nearly half of our analysts think companies overpromote their activities in Europe, the region considered to be the most forward-thinking on ESG. Often companies are doing well in some ESG areas, and say so, but overlook others where they are weaker.
One European financials analyst says: “Some large caps use resources to score highly on third-party ESG ratings without adopting a 'genuine' ESG belief set.”
The need for an international standard
It is important to note that our analysts give relative scores in the survey for their own sectors and regions, so over-promotion of ESG in an advanced region like Europe may still be less in absolute terms than elsewhere. However, even on a relative basis, the findings show there is more work to do.
The newly introduced EU regulations - Sustainable Finance Disclosure Regulation (SFDR) - are designed to ensure that sustainability is reported in a consistent way across the investment industry. SFDR uses a taxonomy that has strict criteria as to what is and is not viewed as sustainable. These developments should help improve European corporate ESG disclosure over time, but Europe will need to link up with Asia (including China, India, Singapore, and Australia) and the US to ensure companies really understand what they should be reporting to investors around the world.