Sustainability Environment

Widespread ‘competence greenwashing’ threatens to derail progress in sustainable finance

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Story at a glance

  • Competence greenwashing is “the practice of intentional or negligent misrepresentation of knowledge, skills, competences, or expertise relating to sustainability or ESG-related activities.”
  • Many companies don’t hire people with the right backgrounds for sustainability posts.
  • This is particularly true at the executive and board levels.

2020 set the record for net-zero pledges, clean energy deployment, electric vehicle sales and sustainable finance initiatives.

As companies race to build their environmental, social and governance — or ESG — credentials under increasing regulatory, market and public pressure, it’s perhaps no surprise that “competence greenwashing” is also on the rise, experts say.

The term was originally coined by Kim Schumacher, Lecturer in Sustainable Finance and ESG at the Tokyo Institute of Technology, as “the practice of intentional or negligent misrepresentation of knowledge, skills, competences, or expertise relating to sustainability or ESG-related activities.”

While sustainable finance and ESG integration are not new concepts, most financial institutions have struggled to recruit the right type of talent to keep pace with the speed and complexity of ESG-related regulatory and market developments.  

According to Schumacher, companies have typically promoted internal candidates with no significant nonfinancial subject matter expertise into ESG or sustainability roles, often simply adding the words “ESG” or “sustainability” to existing job titles.

Even organizations that do hire externally for these positions focus mostly on profiles with a finance background, while science-based ESG expertise remains optional in their candidate search.

Most companies have failed to recognize the full breadth and depth of ESG data points which cut across a myriad of environmental, social and governance issues, and that technical topics such as climate change or biodiversity require both financial and scientific knowledge, says Schumacher.

The same absence of ESG expertise is reflected in the profile of corporate boards, according to research undertaken by the NYU Stern Center for Sustainable Business, which examined the biographies of almost 1,200 board members at Fortune 100 companies.

As of April 2018, only 0.8 percent of board members had experience in sustainable business or development, and a mere 0.3 percent had some form of exposure to ESG investing. Slightly more than 1 percent had experience in energy or conservation, which were the study’s two highest-ranked categories under the “E” in ESG despite their low figure.

Board members fared slightly better in terms of background in social issues. Five percent had experience in advancing workplace diversity, mostly focusing on increasing female presence at the executive level, but other material “S” issues, such as human rights, had negligible — 1.5 percent — board representation.

“As companies and investors increasingly see sustainability and ESG as good business, they are looking to establish themselves as ESG-competent,” says Tensie Whelan, lead author of the study. “Unfortunately, our research demonstrates a lack of ESG credentials on boards, and the SEC and others have pointed to a lack of ESG credentials amongst staff who are theoretically delivering ESG programs.”

Recent developments, such as the appointment of two new members to Exxon Mobil’s board (including one with direct clean energy experience) show incremental change, but boards undoubtedly have a long way to go to demonstrate the expertise required to reiterate companies’ genuine commitment to sustainability. 

In addition, lack of universal ESG standards, which has made the interpretation and comparison of ESG data and disclosures challenging, also increases the risk of competence greenwashing. Completing an ESG certification, a sustainable finance online course or a sustainability leadership program does not equal gaining subject matter expertise, explains Schumacher.

For aspiring professionals keen to pursue a career in sustainable finance, Schumacher recommends the following: Ensure that you enroll into a curriculum that covers both the financial and nonfinancial aspects of sustainable finance equally and avoid presenting knowledge gained through ESG certificates and degrees as deep subject matter expertise.

He also suggests that companies create teams that are made up of an equal number of financial experts with an awareness of ESG issues and non-financial ESG experts with some level of finance knowledge. In addition, more capacity-building needs to be provided to map out the scientific drivers behind sustainable finance and investing.

“Investors, regulators and consumers should ask about ESG credentials as part of their due diligence and corporates should fund training and education on the topic for their teams,” adds Whelan.

Ultimately, building more sustainable businesses starts with hiring the right talent whose experiences and skill sets align with the ESG issues material to your company.