Businesses Should Be Held Accountable For Their ESG Claims

When Rachel Carson wrote her landmark book Silent Spring in 1962, she sparked the modern environmental movement. Her call for better corporate behavior when it comes to the environment took time to sink in, but there is no doubt that it stuck.

Indeed, corporate environmental policies have become so ingrained in business practices that the problem Carson identified has shifted. The question “Will corporations ever do anything to protect the environment?” has been answered.

Today, businesses’ strategies and tactics to prove they are good corporate citizens go beyond the environment to include social and governance practices. ESG has become the widely recognized moniker for these widespread efforts, with great attention paid by investors and to a lesser extent by regulators.

Publicly held companies have, in recent years, begun to standardize and improve their communications to investors about ESG. In doing so, they have been rewarded. The widely circulated Larry Fink message for the CEOs of the companies in which he invests spoke volumes, both in what it revealed about the “sustainability premium” that exists with investors today, and for what it predicted about how that premium will extend to other stakeholders, including consumers, in short order tomorrow.

Though consumers rely on businesses for information about their current corporate environmental efforts and their approaches to social and governance issues, ESG messaging is not something that consumers can easily confirm for themselves.

This is because consumers cannot typically verify the accuracy of these claims for themselves. And if consumers are fed slanted, exaggerated or misleading information about ESG, they likely lose trust that the important progress that is happening is trusted and truthful — as my organization’s National Advertising Division noted in a 2019 case decision on animal welfare advertising claims, which were found to be misleading in that case.

A widespread commitment to accountability in ESG messaging to consumers would be an outstanding complement to the work that is already being done in communicating ESG policies to investors.

There is no doubt the stakes are high. According to a 2020 Capgemini report, about “79% of consumers are changing their purchase preferences based on social responsibility, inclusiveness, or environmental impact.” A 2020 CGS Retail and Fashion Sustainability Survey reported that 56% of U.S. respondents would pay more for a sustainable fashion, apparel or footwear product.

It is precisely because the stakes are so high that this is an important problem to address. Consumers have genuine environmental and social concerns and want to make actual environmentally friendly and socially responsible product and service purchase decisions. Confusion about the reliability of those claims can lead to skepticism. In addition to a variety of potential legal risks, consumers may lose faith in an entire industry or sales medium if advertising frequently misleads or companies hide information about their products or business practices. While there will always be specific truth-in-advertising challenges, often brought by competitors regarding product claims, businesses should continue to strive for general “trust in advertising” as an overall good for the marketplace.

There are a few standards when it comes to how investors are viewing the ESG claims of corporations. For instance, MSCI measures a company’s resilience to long-term, industry material environmental, social and governance (ESG) risks. As MSCI puts it, it uses “ a rules-based methodology to identify industry leaders and laggards according to their exposure to ESG risks and how well they manage those risks relative to peers.”

It has been widely reported (paywall) that the Securities Exchange Commission will soon be looking at the imposition of new investor rules in general, including whether those rules will cover the expanding universe of environmental, social and governance issues.

According to Jon Hale, head of sustainability research at Morningstar, there are calls from many stakeholders seeking ESG regulations. In January 2021, he told the Wall Street Journal: “It’s not just investors demanding it; all other stakeholders — workers, customers, clients, the communities you operate in — they are expecting a higher standard from companies in the way that they operate.”

To those viewing government regulation as the only vehicle to accomplish the setting of that standard, let me suggest that industry self-regulation with accountability mechanisms is a good option to consider. A July 2020 GAO report on ESG reporting also suggested industry-developed approaches as one of the potential approaches to “improve companies’ ESG disclosures.” A self-regulation approach has been used successfully in many industry sectors for decades, helping to generate trust in the marketplace. Such an approach seems ready-made for the improved environmental, social and governance steps that are increasingly being demanded by consumers. 

I cannot say it any better than Black Rock CEO Larry Fink, who wrote in that widely circulated January 2021 message to the CEOs of the companies his firm invests in: “Companies ignore stakeholders at their peril... The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.”

While Mr. Fink did not invent the ESG movement, he and others are accelerating it. Communications to investors about ESG practices are undergoing strong scrutiny. That same kind of scrutiny should be applied to ESG communication to consumers.

Originally published on Forbes.