The Double-Edge Sword of ESG (Environment Social Governance)

Various national and global studies continue to show how quickly ESG is rising on the agenda of company boards and senior management.

In the face of climate change—as well as pressure from stakeholders and increasingly from regulators—companies are recognizing the significant risk of ignoring the subject.

Emboldened by the positive response ( including from their own employees) to statements such as “We are fully committed to ESG” or “ESG is part of how we do business”, many companies are enthusiastically fashioning communication strategies to talk about their sustainability credentials or their “ESG journey”.

But as the restaurant chain, Red Lobster, found out, ESG claims are not exempt from public scrutiny. A lawsuit has been brought challenging their claim that their lobsters come from sustainable sources.

Whether the lawsuit has merit or not, this case highlights that ESG is a double-edge sword. Already for some time investors, proxy advisors, and regulators have been concerned about corporate “green washing”. But the concern today goes further.

For example, the U.S. SEC is looking into whether some sustainability investment funds may be fudging their criteria and thus misleading investors on how ESG-friendly are the companies in which their funds invest. For individual publicly-listed companies there is also risk. Any inaccuracy in how they portray themselves on sustainability or in their reporting could potentially be deemed a false or misleading statement under securities and other laws.

So, what to do? Here are six questions to help reduce the chance that good ESG intentions create legal, ethical, or reputational liability for the company.

1) How good is our governance of ESG? What checks-and-balances?

2) Do we subject each ESG claim to thorough compliance and risk review as we do our regular advertising?

3) Are we involving the Risk and Compliance functions enough on ESG in general?

4) If we report on certain achievements, how reliable are the performance metrics?

5) Overall, is our “sustainability story” too optimistic to be credible…to be sustainable?

6) If we are connecting ESG to the compensation system, are we setting up ESG targets that are too easy for management to reach?