It’s getting tougher by the day getting it right in the ESG field, making it tempting to recall the word’s of 1980s hip-hop classic The Message, which began: “It’s like a jungle sometimes, it makes me wonder how I keep from going under.”

In a nutshell, while companies want to prove their ESG credentials, it’s getting increasingly difficult to place trust in the credentials being put forward. Barely a week goes by without a study or report questioning the criteria used to underpin ESG ratings, and suspicion of greenwashing in particular is rife.

This week saw a trio of big oil and gas companies feel the wrath of the UK’s Advertising Standards Authority, which said their claims on the climate and environment misled the public. The landmark ruling saw TV ads, online promotions and poster campaigns run by Shell, Repsol and Petronas banned.

Misleading claims

In the ASA decision to ban the advertisements the regulator ruled that the companies’ claims on their green credentials were misleading because the ads had “omitted material information” on their larger polluting operations. The regulator felt the impression given was that large-scale oil and gas investment and extraction formed only a minority of the companies’ business models, when in fact the opposite was the case.

Shell expressed strong disagreement with the decision, saying that consumers were aware of its traditional business model, but less aware of its investment in low and zero-carbon energy. Repsol said about a third of its total investment between 2021 and 2025 was to low-carbon business.

At a minimum these rulings, together with actions taken earlier this year against Etihad Airways and Lufthansa, and last year against HSBC and Tesco, show companies have to think much more carefully about how they are presenting their green credentials. Clearly, there needs to be a balance between new green activity and traditional activity that is less so, but if a company is seeking to emphasise what it claims are a more progressive set of policies then, by definition, it will emphasise those and not policies that are less so.

Communication breakdown

One result could be no more advertisements claiming green credentials – and that’s an outcome some environmental campaigners would like to see. But how then does business communicate the fact that it is ‘doing the right thing’ and get support for its actions from investors? This is a particularly difficult conundrum when, for example, the traditional fossil fuel giants might be better placed and better resourced to pursue greener alternatives and need to be incentivized and rewarded to steer this course.

The European Commission has announced ESG rating agencies will be required to certify with the EU financial regulator, and to show there are no conflicts of interest with the businesses they rate. That move follows the Securities and Exchange Board of India announcing in February that ESG ratings providers would need to register with it, and the UK government considering whether to give the FCA increased power to crack down on ESG ratings.

The European Commission proposal to end possible conflicts of interest arising from agencies that invest in the businesses they rate may be one that is most practical and, possibly, easiest to implement, although it won’t be without pain for those agencies affected.

Ratings providers

The proposal would see agencies required to divest from any activity that could be classed as conflicting, such as offering consultation or insurance to companies they rate. Failure to comply could lead to fines of up to 10% of annual turnover. All ESG ratings providers in Europe would be covered, plus those from third countries that provide ratings in the EU.

The logic here is easier to follow – separate those who rate products from those who deal in them. But, again, the question of whether this prevents accumulated expertise from being brought to bear arises.

It may be most productive to view the current turmoil as teething troubles in the evolution of a complex field, which is moving from sloganizing and the stating of good intentions into the detailed discussion of practical measures that make a real difference.

Next weeks’ Climate and ESG Data Regulation Summit, organised by City & Financial Global, will see experts try to tackle some of these difficult challenges. We’ll be reporting the key themes on GRIP.

And while there is no doubt that it will still be “all about money”, perhaps the way forward in the field of ESG is no longer having to have a “con in this land of milk and honey”.