Greenwashing is as old as sustainability. It happens when companies use misleading labels or advertising to create an image of environmental responsibility without actually becoming more responsible -- think “all natural” meat that comes from factory farms, or oil companies that tout minor renewable projects to bolster their reputation while directing most of their capital spending toward extracting fossil fuels.
As demand for green assets rises, investors are getting more concerned about looking under the hood of their holdings. One response has been for companies or investors to turn to third-party rating or data providers -- such as ISS-Oekom, Sustainalytics, or Vigeo Eiris -- to verify claims. Such ratings can cover a long list of factors including:
• crime-prevention controls
But skeptics warn that without a standardized approach and robust set of data to compare, ratings can be unreliable. That’s why the European Union is working on a set of guidelines that would introduce a clear methodology and disclosure requirements for ESG analysis or rating providers, and comparable criteria for so-called green bonds. Even with that kind of infrastructure, it may still prove to be difficult to evaluate goals with hard-to-measure outcomes. Citigroup Inc. credit analysts highlighted in a May report how companies in industries criticized by environmental or health campaigners, such as oil or tobacco, are able to get high ESG marks because the scoring systems favor companies with clear policies. They might have high scores in fair labor practices, board composition, or shareholder rights that increase their overall ESG ratings.
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