Green washing refers to abusive marketing activities that exaggerate, misrepresent and mislead about the company’s eco-conscious behavior, products or financing. The tendency of companies to oversell is expanding from environmental to social areas and coining new color-themed names. It is true that false ESG communication could happen unintentionally. Companies must carefully pick the words they use in communicating corporate sustainability practices because inspectors and civil society are paying more attention to their messages, their activities and their performances in order to track ESG targets.

ESG color-washing

With the ESG hype, there once was a joke that said companies are busy adding words such as “eco-friendly,” “sustainable,” “green” and “reusable” nearly in front of every noun. Such greening habits spread to social or overall ESG-washing, including labor and human rights, gender equality, safety and health, and education. Experts on ESG disclosure and reporting are concerned about companies using too much of this kind of coloring because it could have adverse impact on their businesses, investors and relationships with consumers.

It sends wrong information to the market and investors, but it also causes the company to be less aware of what must be changed. For example, once there was a criticism of pink-washing, called “think before you pink”: Automotive companies held large-scale support for breast cancer without reducing the industry’s impact on the disease that is linked to car emissions.

Rainbow-washing refers to companies or governmental organizations that promote pride for LGBTQ+ without fully granting their rights in the organization’s policy. Blue-washing refers to United Nations Global Compact to criticize companies joining the program for the sake of their image while not changing their controversial business practices.

In addition to the above controversial situations, companies have long used color as part of their cause marketing strategy. For example, red was once used by a group of companies to show support for the fight against HIV-AIDS years back. In South Korea, yellow has been adopted to support those who suffered tragic events. Globally, orange is used to campaign for animal welfare and leukemia; purple for religious tolerance; blue for freedom of speech. The list goes on.

ESG disclosure trends

While there is no globally standardized disclosure framework, the Group of Seven Finance Ministers and Central Bank Governors endorsed a proposal to develop global standards that could form a global baseline for sustainability information in June 2021. The Group of 20 communique confirmed this intent in July. In addition, governments such as the US, Singapore, Japan and the EU are forming new ESG disclosure and reporting measures.

The good news is that institutions are both strengthening and simplifying disclosure schemes to lower the entry for broader use. Last summer, the US House of Representatives passed landmark legislation, the ESG Disclosure Simplification Act of 2021, for companies filing with the US Securities and Exchange Commission. The bill still awaits Senate approval. In addition, the EU is considering mandatory digital ESG disclosures using the Inline XBRL for Corporate Sustainability Reporting Directive to improve user-friendliness.

Since ESG disclosure is becoming an obligation, multinationals should work toward authenticity, measurability and proportionality to avoid green washing. Authenticity is about being open in and out through “comply or explain” mechanism. It requires consistency between ESG practices with marketing and communication materials. Measurability starts with an impact-based materiality assessment. Stakeholder impact must reflect the key ESG issues in alignment with the business goals. Lastly, proportionality is a balanced and critical mindset to improve the lagging areas while ensuring all three elements are embodied in the disclosed information.

Regulations to support, not control

Companies must carefully check if they are coloring or ornamenting too much because ESG is not about sustainability marketing anymore. Any washing can hurt the company, investors or the sponsoring institutions like the UN and International Organization for Standardization if the company does not manage ESG continuously. In addition, ESG directly influences investment decisions that rely on credit ratings based on the company’s ESG disclosure information. Companies will face legal, reputational and financial risks if caught overselling sustainability practices.

Due to investment risks, governments are working on measures that penalize companies that abuse ESG. However, disclosure regulations were established not to control and punish companies but to set a level-playing field among companies with different corporate ambitions and capacities around sustainability. In addition, it was intended to encourage businesses falling behind in climate change transition.

Therefore, regulators must remember to harmonize the different starting points and focus on effectively reducing green and social washing. Formulating green and social taxonomy as guideposts are what institutions can provide for companies to speed up the progress. The EU has already structuralized the taxonomy systems as part of this effort. South Korea’s relevant institutions will soon announce the K-ESG and K-taxonomy framework. Hopefully, this regulatory motive will serve to balance the sustainability gap and buttress companies to expedite their ESG capacities.

Lee Yeon-woo
Lee Yeon-woo is an expert adviser at the Korean law firm Bae, Kim & Lee. -- Ed.