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ESG Investing: Accounting for Accountability

By:

Senior Market Analyst at Interactive Brokers

The financial markets’ increasing attention on ESG investing has largely placed corporations under a microscope, with ever-growing scrutiny to discern whether they are following-through on their stated commitments to achieve better environmental, social and governance practices.

It seems many companies have historically sought to sidestep controversies, and their associated, potential adverse financial impacts, by creating certain false perceptions about improving ESG-related issues within their operations.

Some analysts have highlighted certain companies in the tobacco industry, for example, for long-arguing against certain health risks caused by cigarette smoking, or chemical and oil firms for protecting the production of lead-based products in the 1960s and 1970s.

Corporations that merely give the impression they are actively improving their business standards – in line with ESG-related principles, and the UN’s sustainable development goals (SDGs) – have largely received certain branding within communities whose values are pinned to environmental, social, and governance issues.

For example, terms such as “green washing”, “social washing”, “blue washing” and “pink washing” have arisen, along with a call within the global financial markets for higher standards of corporate accountability.

But what do these terms mean? And how can companies be held accountable for their actions, when the same level of generally-accepted standards that apply to their financial data don’t apply to their compliance with ESG?

Green Washing

While the term “green washing” dates back to the mid-1980s, companies that aimed to mislead the public they were environmentally friendly, whether through ads or corporate branding, extends further back in history.

Analysts have cited several instances of green washing by certain energy and fossil fuel companies throughout the past several decades, including Westinghouse’s nuclear power plant adsmarketing campaigns conducted by Chevron, BP’s branding colors, and, more recently, Italian oil giant Eni’s marketing ploy that claimed its ‘Eni Diesel+’ had a positive impact on the environment.

In fact, that firm was recently hit with a €5 million fine, after Italy’s advertising regulator ruled, in part, that it was particularly deceitful for Eni to use “Green Diesel’ and the qualifications ‘green’ and ‘renewable’ to refer to the Hydrotreated Vegetable Oil, or HVO, component of their product.

The ruling stems from findings of environmental harm posed by palm oil, which is understood to be a catalyst for rainforest and wildlife destruction.

Apart from the regulatory fine, any further production of diesel fuel containing palm oil has come under fire by Italian activist-led, non-governmental organizations, who have petitioned in the tens of thousands to halt the practice.

Such negative media attention, potential activist-led regulatory reform, and financial harm are some of the ways in which Eni, or a similar company, may be held accountable for their green washing actions.

Given the consequences, they may decide to follow-through on improving their business practices to avoid further financial and reputational damage, which could also come from ESG-concerned stakeholders, as well as shareowners, who hold sway over the composition of the company’s board, as well as its stock price.

Looking Ahead

Given the growth of ESG investing, it is likely firms have an increasing motivation to shun these false perceptions and commit to greater standards of internal accountability.

Want to Know More?

Learn more about other deceptive marketing practices such as social washing, blue washing and pink washing in our Traders’ Academy lesson ESG Investing: Accountability, part of our full Traders’ Academy course on ESG Investing. Also, keep current on ESG-related developments with commentary on IBKR’s Traders’ Insight, as well as through certain of our Webinar presentations.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers LLC, its affiliates, or its employees.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

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