Monday 17 Jun 2024
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This article first appeared in The Edge Malaysia Weekly on June 20, 2022 - June 26, 2022

The consequences of greenwashing are no longer just limited to businesses receiving flak from activists. In the worst cases, businesses that engage in greenwashing are ending up in court.

Late last month, DWS Group was raided by German officials following a whistle-blower’s allegations that it had sold investments that were “greener” or “more sustainable” than they actually were. Meanwhile, Dutch airline KLM was sued for publishing advertisements that claimed its flights could create a more sustainable future. 

These court cases are no joke. Shell, for instance, was ordered by a court in the Netherlands to reduce its carbon emissions in line with the Paris Agreement last year, following a lawsuit filed by an environmental group. 

Regulations are already being proposed in the UK, the US and the European Union (EU), among others, to penalise companies that practise greenwashing.

Clearly, greenwashing — defined as the sharing of misleading information by organisations to appear environmentally responsible — is being scrutinised heavily by various parties now.

Even ESG, which also covers the social and governance aspects, has no lack of critics who believe that it is a greenwashing tool. Its most recent critic is Elon Musk, CEO of electric vehicle (EV) maker Tesla, who called ESG a scam last month after his company was removed from the S&P 500 ESG Index. He questioned how an oil and gas company like Exxon Mobil could remain on the index when an EV maker had been expelled. 

While Musk’s allegation triggered debate in the market, the index provider’s response highlighted the complexity of ESG. It said that Tesla’s lack of a low-carbon strategy and codes of business conduct, and poor working conditions reported in its factory had affected its score, according to reports. 

What this illustrates is that ESG is still a relatively new and developing concept across the world, where definitions of what is compliant and what is not is still being ironed out. This also creates the opportunity for greenwashing, especially to the undiscerning investor or consumer. 

Because ESG covers a wide area, stakeholders have different opinions on what is acceptable and what is not. Even regulators and experts in the EU cannot agree on what can be put under the “sustainable” umbrella. 

“There are prominent automotive companies that make EVs, so that’s good on the environmental side, but what about the social and governance factors? How have these companies responded to regulators when they were questioned? It’s easier to aggregate numbers in a financial statement. But with ESG, there are over 1,000 indicators and metrics,” says Herbert Chua, partner and sustainability assurance and reporting lead at PwC Malaysia.

“Aggregating all the different data points under the environmental, social and governance factors is very difficult,” he adds.

“In my view, each of these should be looked at separately rather than being put together in one number, given how diversified these metrics are. There are a lot of trade-offs when you do that.”

For example, a company may achieve net-zero emissions by 2050. But in the meantime, the company cut off half of the small and medium-sized enterprises (SMEs) in its supply chain because they were not able to meet its demands. 

SMEs, however, are drivers of the economy in developing countries. So, if a company reaches its environmental targets but fails to address its social responsibilities, can it be considered “greenwashing”?

That is a question posed by Andrew Chan, PwC’s Southeast Asia sustainability and climate change leader. “How can we balance that? We’ll need better-quality data and shareholders with a more holistic view,” says Chan, adding that credible data to back up those claims are crucial.

ESG in itself is not greenwashing. When used properly, it can effect real change, say Jigar Shah, head of ESG research at Maybank Investment Banking Group, and Renard Siew, climate change adviser at the Centre for Governance and Political Studies. 

Obvious cases of greenwashing are misleading or false claims about products and services; statements not based on science; misrepresentation of data through graphics; sustainability targets that are not substantive, or businesses that fake emissions reductions by using inauthentic offsets. 

“But from my observation, greenwashing is a spectrum. There are companies that genuinely want to improve and are doing what they can with limited capacity. Sometimes, it is due to ignorance because they do not know how to account for carbon emissions. A lot of companies are still at the nascent stage in ESG currently,” says Siew. 

Greenwashing in sustainability reports?

Most listed companies around the world are required to produce sustainability reports. But this can be an avenue for greenwashing if the companies make exaggerated claims and have scarce data to back them up, and if they only report on indicators favourable to them.

Fortunately, progress has been made in tackling greenwashing in reporting. The primary strategy is to standardise ESG-related disclosures so there is comparability of data across companies in the same industry. The International Sustainability Standards Board, which was announced last November, is working on creating this standard currently.

But even if companies report ESG-related matters in a standardised format, what will stop them from putting in false information? Could there be a mandatory audit of the data, such as there is for financial reports?

Some companies are already voluntarily getting their material data assured. But this comes with an additional cost. 

“When clients first came to us for assurance of data, a lot of it was not entirely accurate and complete. At the moment, a majority of the listed companies do not get any third-party assurance on their data. How credible is the data?” asks Chua.

“We definitely think this data should be assured. But it’ll take time for that to happen. In Bursa Malaysia’s recent consultation paper, it indicated that going forward, each company should make a statement on whether its sustainability report has been subject to any third-party assurance and if so, what is the scope of work done.”

The latter point is important because the third-party assurance has to be done according to globally accepted standards as well. “Some service providers don’t follow these standards, so it’s difficult to tell how they go about providing assurance to the data,” says Chua.

Greenwashing by rating agencies?

Many fund managers and investors rely on the services of rating agencies to ascertain companies’ ESG performances. These scores are used to build ESG portfolios and indexes, which underscore the important role these agencies play.

But the rating agencies have their unique methodologies, and this can result in vastly different conclusions. To illustrate this, PwC and Capital Markets Malaysia analysed the top Malaysian public-listed companies rated by four major ESG ratings agencies, and found that out of the 41 companies featured, nearly half only appear once and only one company appeared in all four ratings. 

How can investors understand these different scores? Could this be an avenue for greenwashing, given the complexity of the methodologies and lack of consensus? 

Chan points to the case of a UK-listed online fashion company as an example. The company was highly rated by agencies and as a consequence was included in ESG funds. But this changed when it was hit with allegations of poor working conditions in its factories in 2020, an issue that was not  reflected in the overall rating scores. 

Ultimately, the different scoring by rating agencies is not a problem, the interviewees say. Instead, the onus is on the investor to understand the different methodologies and do further due diligence on each company. 

“We have come across quite a number of ESG ratings and research providers and learnt that the differences in methodology allow for different measurements and interpretations,” says David Ng, deputy managing director and chief investment officer of Affin Hwang Asset Management. 

“For instance, an ESG rating agency that rates companies based solely on the amount of ESG disclosures would end up with a score different from another agency that benchmarks the company’s ESG performance indicators [against] industry peers.”

Obviously, these scores cannot be compared. This is not necessarily greenwashing, Ng opines, and investors should think of ESG ratings as merely one tool to assess the companies. 

The challenge would lie in the extra resources required to analyse each ratings agency and furthermore, each company. 

“How do you differentiate who is good at what? Different players cover countries differently, and some international ones don’t have much coverage of Malaysia. You need to really know why you’re using this data and who has the most appropriate data set and coverage, and what kind of philosophy they’re using to process the data,” says Chan. 

Jigar believes that things could change when the reporting standards are harmonised, but a complete standardisation like that of credit ratings is difficult to imagine at present.

“The correlation between the ESG ratings providers is not more than 60%. Every ratings agency has a different take on materiality. The variance in their rating opinions is actually very healthy and allows for different points of view to co-exist,” he says.

Greenwashing by ESG indices and funds? 

Carbon-intensive sectors such as oil and gas can still be found in major ESG indices and funds. Some investors have also stated that they prefer engagement with companies over divestment, hence companies in carbon-intensive sectors could still remain in their portfolios.

In fact, UK climate think tank InfluenceMap found in 2019 that 118 climate-themed funds globally have roughly the same aggregate intensity of exposure to thermal coal reserves as the iShares MSCI World Index Fund.

Last year, it assessed 723 ESG and climate equity funds and found that most are not aligned with the Paris Agreement goal to limit global warming to 1.5°C, and climate-themed funds continue to hold a high amount of fossil fuel production value chain companies. 

Is this a form of greenwashing or a matter of mismatched investor expectations on what ESG is? 

The interviewees’ response is that investors have to understand what their objectives are and what the fund manager’s philosophy is. Some fund managers, for instance, believe in the transition narrative, where they encourage companies to improve by engaging and investing in them. 

“If you write off an industry or company immediately, you’re not really giving them a fair opportunity to improve. You have to work closely with them to make that transition happen,” says Siew. 

Investors who do not want to invest in certain sectors will have to search for funds that meet that requirement. “Some investors may be all right with an oil and gas company as long as they are one of the responsible ones. These companies are creating jobs and economic impact. Others may apply a different philosophy. The difficult thing in ESG is to not over-impose your views. Give the right information and allow people to make their own judgement call,” says Chan.

Of course, it might not always be clear what an ESG fund stands for. That is why sustainable finance taxonomies are being introduced. The EU’s Sustainable Finance Disclosure Regulation and the UK’s Green Claims Code are some examples. 

In Malaysia, there is the Sustainable and Responsible Investment Taxonomy for capital market players, the Climate Change and Principle-based Taxonomy for financial institutions and the Asean Taxonomy for Sustainable Finance. 

But given how broad the definition of ESG can be, would a taxonomy be too restrictive? The Platform on Sustainable Finance, which is a group of green finance experts, has criticised the EU’s taxonomy for classifying fossil gas and nuclear as “sustainable” investments. 

Still, the existence of a taxonomy is useful in creating some consistency in definitions. “Having said that, we think it would be impractical for a taxonomy to be too prescriptive and exhaustive, as it could inhibit innovation and reduce capital available to sectors that require investments to transition and decarbonise their operations,” says Ng.

Does ESG actually have an impact?

A few plantation and manufacturing companies in Malaysia have already gotten into trouble for allegations of worker mistreatment. Some institutional investors have voted against the re-election of executives or sold shares in companies involved in controversies (see box story).

These could be considered as early evidence that ESG is not just a marketing ploy, say the investors. The move by institutional investors like the Employees Provident Fund and Permodalan Nasional Bhd to introduce sustainability policies in the past year has also sent a signal to the local market.

But many institutional investors and fund managers have said that they prefer engagement over divestment in companies. Could this be a slippery slope, since companies that fail to comply with ESG could remain in the portfolio under the excuse that they are still “transitioning”?

This is where transparency is very important, says Siew. “What is it that you are engaging with your portfolio companies about? Are you agreeing on a transition plan by a certain date? We need to have concrete action plans.”

As the pressure on institutional investors increases, however, their stance has also been changing, says Chan. “When we first started working with an institutional investor over a year ago, its management team said they will not divest unless it’s the last resort. But not too long ago, they told us a lot has changed and they would consider divestment as a form of signalling.”

“Otherwise, companies might think it’s all right to have governance breaches time and again, or have forced labour issues and not deal with it seriously until an activist (brings it up).”


Examples of prominent ESG cases in Malaysia 


Petronas was excluded from JP Morgan’s ESG Emerging Market Bond Index and ESG Asia Credit Index in 2021. The bank said this was because the company’s score fell below a required threshold. Petronas responded, saying that the decision is not an accurate representation of its commitment to ESG practices. 


According to the United States Customs and Borders Protection (CBP) website, seven Malaysian companies in the glove and oil palm sectors have been slapped with the Withhold Release Order (two with inactive status) since 2019, owing to allegations of the use of forced labour. Some of the companies have been actively working with the CBP to address the issue. 


Shareholders of Sapura Energy Bhd, including the Employees Provident Fund (EPF), voted against the reappointment of the company’s directors in 2018 because they were unhappy with the excessive remuneration received by the CEO. More recently, Serba Dinamik Holdings Bhd, which was charged by the Securities Commission for falsifying its financial statement, lost EPF and Kumpulan Wang Persaraan Diperbadankan (KWAP) as its substantial shareholders after the incident. 


Tips for investors to spot greenwashing

 1  If a company has a net-zero commitment, look at the actions it is taking and whether it has a clear road map. What data is it using, what baselines has it set and what are its short and medium-term targets? 

 2  Is the company planning to use carbon credits to meet its climate targets instead of actually cutting emissions? 

 3  What resources has it invested to reduce emissions?

 4  Has the reported data received third-party assurance? 

 5  Many companies report input and output indicators but less on the outcome. Look for the outcome of policies put in place.

 6  Did the company break down its scope one, two and three carbon emissions? Did it explain clearly which scope of emissions is included in its net-zero goal? 

 7  Compare claims by the company against actual data by the company and industry bodies. For example, most oil and gas companies have spoken about reducing emissions for years. But many are still putting significant capital expenditure into new oil and gas projects. In some “hard-to-abate” sectors like aviation and cement, companies set net-zero targets without proper validation of those targets and breaking them up into small milestones. 

 8  How much detail is in a company’s sustainability report? How is it linking its sustainability initiatives to its corporate strategy? 

 9  Has the company put ESG-related key performance indicators in place for various teams? 

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