Why sustainability washing is a disaster and how to avoid it

Authorities in America and Germany last week began a probe into allegations that Deutsche Bank exaggerated its environmental and social credentials of ESG-labeled banking products.

Specifically, DWS, the fund subsidiary of Deutsche Bank, is being investigated for having dealt with criteria for sustainable investments too carelessly.

The US Securities and Exchange Commission and other authorities already started investigations on the same and the news of the investigation has resulted to the German bank losing 2.5 percent of market capitalisation

This is turning out to be a repeat of what was known as the Volkswagen emissions-cheating scandal which happened six years ago.

Volkswagen cannot seem to shake off its “Diesel gate” scandal, even as it has cost the company over $30 billion in fines, penalties, restitution and settlement of lawsuits since September 2015.

Clearly the Deutsche Bank investigations are not good news for the bank as well for the financial sector. When sustainability credentials claim are under investigation, impact will be felt across the sector as it is going to set precedence for regulators and other stakeholders with sustainability reporting expectations.

Environmental and social responsibility is now high up the agenda. The pressure is on to ‘be sustainable’ from customers, employees, shareholders.

It is no wonder that some companies exaggerate their sustainability practises - and others run the risk of ‘sustainability washing’.

‘Sustainability washing’ involves companies either misleading consumers about the sustainability credentials of a product or service, or misleading consumers about the sustainability performance of the company as a whole.

The possibility of sustainability washing is becoming more rampant when all around the world, governments, investors, businesses and the public are rapidly raising their ambitions on global challenges such as the climate action. Germany, Deutsche Bank and Volkswagen are not exceptions.

The reality is that sustainability washing is rampant especially where the management realises the value that comes with the label “sustainable” as well as the pressure exerted by the stakeholders.

As more companies in our continent trend towards sustainability, with some proclaiming themselves as sustainable companies, there is need to go back to the drawing board and figure out how they should implement and report sustainability.

Unfortunately, the buzzword is a sustainability report and every blue-chip company or those wanting to be blue-chip are competing to issue sustainability reports. The two examples of Germany multinationals are an example of the destructive power of poor leadership in sustainability, lack of knowledge and tools on sustainability and a diseased corporate culture.

The above are not “soft” factors. They might end up costing senior leadership their jobs, may constitute stricter regulations of the various sectors, may lead to lives ruined and hard-won billions of dollars lost.

Other effects may include damage to the business through loss of revenues, damage to shareholders through the loss of investment value, damage to reputation and the loss of the social license to operate as well as loss of employees. This will also have even bigger consequences to the country as well the sector in which the company that is greenwashing is domiciled in.

If companies are serious about transitioning to sustainability and avoiding sustainability washing, then they must move quickly to address the current gap in knowledge and tools and at the same time aim to align their strategies with sustainability.

Once this is in place, then the development of the relevant targets and reporting frameworks should be put in place that will be in line with emerging market practice.

There is also the need for regulators and governments to consider the shift from voluntary to mandatory disclosures in sustainability. Such a move will not only reduce the chances of sustainability washing but will also help in improving peer competition and board and executive accountability.

There is no doubt that sustainability qualifications of companies’ directors and executives is wanting, and mandatory disclosure frameworks should provide the carrot to increase competency.

Assurance of the sustainability reports issued by companies is another way that can safeguard them from sustainability washing. Assurance will ensure the credibility, reliability, and accuracy of sustainability information disclosure in sustainability report.