In his keynote address at the 2021 Global Investment Conference, Karthik Ramanna, professor of business and public policy at the University of Oxford’s Blavatnik School of Government, described the practice of greenwashing in corporate environmental, social and governance reports as “rampant.”

“I’m going to give you some fairly specific tactical tools to tell the signal apart from the noise when it comes to greenwashing. The practice is, frankly, very rampant in a lot of reporting around ESG. There are, in fact, some key conceptual differences in people’s world views on ESG. These ideologies result in the way ESG reports are prepared.”

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The approach taken within ESG reports is indicative of the authors’ acceptance of one of three ideologies about ESG, he said, referring to these ideologies as the long-term shareholder, corporate responsibility and pragmatic perspectives.

Dominant in the English-speaking world, the long-term shareholder view holds that ESG efforts must be profit-driven. Most frequently held in continental Europe, the corporate social responsibility view tends to conceive of a corporation as being beholden to more than just its stockholders. The pragmatic view tends to dominate in the developing world, where companies are less driven by internal ESG commitments, but will adapt to them to secure business.

“Understanding is key,” said Ramanna. “Unless you understand the ideology at the corporate level, you will never be able to make any sense of what is in those reports.”

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After identifying a business’s particular ideology, investors may still fall into three common rhetorical traps used by companies to greenwash their reports, he said, referring to these as the fungibility, materiality and emissions traps.

The fungibility trap involves confusing readers about trade-offs made regarding moral issues. As an example, Ramanna pointed to a mining company’s report that highlighted a cut in the fossil fuel emissions of its transportation vehicles following a switch to a hybrid fleet. What wasn’t indicated was that the precious metals used within the fleet’s batteries were mined by indentured workers.

“What the company has explicitly done is trade-off carbon emission for indentured labour. ESG reports implicitly, and perhaps unknowingly, make these sort of moral trade-offs.”

The materiality trap refers to the integration of financial and ESG information. Within corporate ESG reports, activities with high financial salience are less likely to be reported than ones with a much lower impact on the bottom line but a more impressive impact on ESG-related concerns.

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The emissions trap relates to environmental reporting. In most reports, the emissions footprint of all links within a supply chain is estimated, said Ramanna, noting this approach is fundamentally flawed, as the estimates can’t be made with any degree of accuracy. Instead, he proposed a new system under which carbon emissions information is tracked and passed from client to consumer at every level of the supply chain.

Ramanna concluded with a warning that ESG reports are fundamentally the product of public relations officers rather than of actuaries. “There is no equivalent to the prudence principle in ESG reports. If anything, they are written under the imprudence principal — anticipate any good news. Quite frankly, there is no penalty for not talking about the bad news.”

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