“Avoid dishonest gain: no price can recompense the pangs of vice.”

Benjamin Franklin

In a world where business stakeholders are increasingly trying to make a conscious and genuine effort towards practicing and promoting sustainability and being more mindful of the environment and society, fears about greenwashing and/or falling into its traps are always lurking in their minds. Just making statements, pledges, or claims does not qualify a business to proclaim itself as sustainable without being backed by real action, and transparent and verifiable data.

In our earlier article, the moniker EHG –“ Eyewash, Hogwash and Greenwash” looked at the ways to overcome the pitfalls of such superficial claims of sustainability. It is time to crank up a notch and dive deeper into how we can empower ourselves into spotting the deception and misleading practices and make informed and responsible choices.

Everything Painted “Green” Is Not Really Green

Words like “eco”, “sustainable” and “green” are loosely used these days - rarely pertaining to any scientific evidence or measuring standard.

Investors should think about the broad picture and question the authenticity of such advertising campaigns and the intent of the businesses to adopt sustainability practices than just falling prey to the glossy “green” picture. For instance, can the environmental claim made by a plastic bottled mineral water company be taken at face value without any investigation?

The Bigger the Agency, the Deeper the Greenwashing

From rich governments to fancy brands, all are trying to jump on the pandemic-led bandwagon of sustainability and willing to pour millions of dollars to coat the net-zero, plastic-neutral, or diversity-inclusive narrative.

On a lighter note, it won’t be a surprise if someone publishes a standardized manual for greenwashing sooner than the standardized disclosure norms for ESG.

Replacing plastic with something else (read: Aluminum) and claiming that it is a greener, more environment friendly, socially responsible, and convenient alternative is just a pretense. The fact that this seemingly better alternative ranks poorly from a carbon and biodiversity perspective is conveniently overlooked.

India Has Its Fair Share of EHG

Investors coming to the Indian shores in search of sustainable stalwarts need to understand that India ranks as ‘High risk’ on the ESG front and Indian companies are fast becoming aware of the incentives of appearing environment friendly and sustainable. This is because becoming ESG compliant involves the restructuring of entire manufacturing processes, inspecting every bit of waste produced, setting up teams to check on the carbon footprint of the corporation – and extending this to the supply chain. For these reasons, greenwashing in India could be rampant.

1. Greenwash

There is a large manufacturing company in India making regenerated cellulose fibre made from wood pulp, claiming it as a sustainable natural resource, bio-degradable and eco-friendly. When we scanned through the production units of the company, we found that one of its chemical divisions was causing contamination of water and damage to the environment and public health. Implementation of zero liquid discharge action plan for which the company was upheld in 2013 is still ongoing. There is also non-compliance in installing flow meter and stacks. The company has also paid a penalty for violating pollution norms. A river around its other plant is also found polluted by anthropogenic activities.

Water Quality Index at different points of monitoring of Tungabhadra River on the banks of which Grasim VSF Plant is located. The water quality at different station at different monitoring times seems to be unsatisfactory which indicates the presence of contaminants in water, and it is not suitable for drinking even after disinfection. The highlighted portion suggesting ‘US’ stands for unsatisfactory water quality.

The company was also fined for storing huge amounts of mercury, obtained as a by-product, in its premises. So while the company boasts of a sustainable product and sustainability at its core, the above issues aren’t even spoken about, a complete greenwash!

Also, the Air Quality Index in places where the company operates its two plant shows poor ambient air quality with measures significantly above the permissible limits.

2. Hogwash

With the ongoing market rally and start-up valuations hitting the roof, a tech company was recently listed on the Indian bourses allowing some of the private equity owners to exit the company. One of their private equity investors who still owns 15.18% of the company (post-listing) had appointed a Partner of their Statutory Audit firm as a nominee director on the board of this Tech Start-up as a non-executive director on 30th March 2015.

After serving ~7 years on the board as a non-executive director and helping them grow strategically; just prior to listing, on 26th February 2022, this nominee director resigned from the board only to be appointed as an independent director on 1st March 2022. He also currently acts as a Chairman on the board and a member of the Audit Committee.

Legally, company has manoeuvred through all the regulatory requirements, but in spirit, we do not believe that the board is truly independent as an independent director should not have any prior relations to the board and especially of the largest shareholder of the company. This lacks good corporate governance standards and is a complete hogwash.

3. Eyewash

When it comes to ESG credentials, there is considerable reliance on self-disclosure and self-certification. This could lead to exaggerated claims by organizations to present themselves on the right side of things.

This is not only restricted to companies, but also true for investment managers and sustainable indices. Investment managers can potentially get themselves the grandest tags that certify them to be responsible managers by a process of self-certification without having to verify their tall claims. Even sustainable stock market indices get recognition without being true to label. They are, at best, sustainable on the margin. The top weight in a stock market index is given to a company that outweighs others on the criterion of market cap, and not on its sustainability credentials. A company may be a relative ESG laggard but if the company is large, it receives a higher weight in the index. So, a poor ESG company gets more of your money and a superior ESG company gets less of your money!

Using Information Asymmetry to Authenticate

Capitalism today is more ruthless than ever as businesses capitalize on the emotional vulnerability of consumers and investors by choosing to maintain information imbalance/distortions.

With increasing focus on environmental consciousness and the willingness of people to pay a premium for it has made it further lucrative for businesses to practice greenwashing. Conjuring a green image in order to secure a social license to operate especially in sectors where the sustainability records are often missing or questionable is countering the efforts of businesses genuinely operating sustainably.

While green and quirky marketing may help businesses win a quick buck, reputation loss and permanent boycott of its products and services is a potential risk in the long run. Companies thus need to take their sustainability mandates seriously and collaborate with stakeholders to build a truly greener and inclusive future.

Governance Approach to Navigate the Corporate Spin

“Greenwashing” at the end of the day is a matter of ethics; it is a reflection on its corporate social responsibility if a company declares itself as environment friendly, whereas, in reality, the company may not live up to its commitment. Hence, it boils down to “Corporate Governance”. It effectively means assessing the credibility of the Board and the management of the company and analyzing the decisions they take. How these decisions have impact different stakeholders gives evidence of the principles they stand for and the value systems they follow.

Quantum has used our proprietary integrity screen to navigate exemplars of bad corporate Governance in India since 1996. In our ESG framework, Governance sits at the heart of the analysis. We believe that shortcomings on corporate governance go hand in hand with poor performance on the social and environmental fronts, making it a good proxy for wider problems.

Not “tick-the-box” Desk Research

Source: QASL Research

Quantum believes that verification of ESG credentials still warrant a detective lens and one cannot and must not rely on self-disclosures. A comparative analysis of a company’s data on various parameters v/s datasets for all companies within a sector can provide reasons for inquiry. Information can also be obtained from many unconventional sources like NGOs, local community, regional / regulatory boards. We aim to meet sustainability officers or key management personnel to understand the ESG strategy of a company and seek answers to our queries.

Many companies create the impression that they are doing the right thing for sustainability, but then fail to produce relevant and tangible information about the action they are taking. Further, we visit plants - including that of supply chains - to get a first-hand verification of the tall claims. Furthermore, a 360-degree check by interacting with dealers, vendors, employees, customers, and regulators does go a long way in identifying any inflated or absurd claims made by the company.

Avoiding the “EHG” Evil

Clearly, all this work to differentiate the greenwashers from the genuine folk could be easier if investors and the public had a standardized approach and robust set of data to compare. Private ratings systems can be unreliable and corporate reporting is spotty and hard to compare. Thus, till better regulations bring greater transparency, standardization of disclosures and quality ESG actions, investors would have to account for the fact that what you are told is at times far from reality. ESG sometimes can be EHG.

Policymakers and regulators around the world are coming in strong with policies and laws in favor of customer protection and stakeholders’ interests. As a stakeholder, it warrants a timely deep dive into knowing the trends shaping up in terms of new ways of greenwashing and educating oneself to avoid being eye-washed.

Greenwashing - The Darker Side of ESG in India


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