Expectations regarding companies' Environmental, Social and Governance (ESG) practices continue to evolve. Investors are increasingly putting downward pressure on their portfolio companies, vendors are imposing ESG requirements on their suppliers, employees increasingly seek companies that align with their personal values, and customer behavior is shifting in favour of ESG ideals. At the same time, companies themselves are increasingly coming forward with bold ESG commitments (e.g., "net zero" by a certain year), some of which are linked to executive compensation. These pressures, combined with an evolving standard-setting, regulatory, and internal control environment, can make ESG claims, products and reporting ripe for potential fraud and misrepresentation.
"ESG washing" is a relatively new term that has been used to characterize some corporations' overselling of their ESG efforts and initiatives to gain a favourable impression from investors, consumers, employees and/or other stakeholders when the actual substance of those ESG initiatives falls short of any objective standard.
Here is a primer on the various types of ESG washing and terminology that has emerged in recent years (note that this terminology is not authoritative and can vary by user):
- Greenwashing: This is perhaps the most well-known of these terms. Environmentalists have been using it since the 1980s to call out substandard corporate environmental policies and results. It refers to the practice of misleading/misinforming stakeholders and the public about the organization's environmental impact and/or initiatives. A common example: suggestions in hotel rooms that guests refrain from asking to have their towels washed and replaced every day as an act of environmental stewardship. But can not refreshing hotel room towels actually save the environment, or does it just save costs?
"Carbon washing" is a more specific form of greenwashing that focuses on corporate misrepresentation of reduced carbon emissions, which is done by overstating either (or both) the actual reduction of carbon emissions or carbon offset credits.
- Bluewashing: This one has been used most commonly in two different ESG contexts:
- When coastal, oceanic, and marine development initiatives—whether public- or private-sector driven—deliver little to no sustainable benefits and may instead cause harm to aquatic environments. Consider the push toward aquaculture/fish farming, where seafood is cultivated in a controlled environment rather than being harvested in the wild to prevent the overfishing of wild fish stock. This has instead resulted in other forms of pollution such as chemical leakage, aquatic disease transmission, the introduction of invasive species, overfishing wild stock to feed carnivorous species being farmed, and more.
- When businesses registered as part of the UN Global Compact (UNGC), a non-binding pact to follow ten principles on corporate ethics and sustainability, advertise this commitment to stakeholders without actually adhering to the UNGC principles.
Several forms of "social washing" have also arisen with respect to insincere ESG activity. Social washing is when organizations market themselves as socially responsible and conscious—especially in the context of human capital (e.g., labour rights, human rights, equality, etc.)—when, really, their internal practices are misaligned to these values. Examples include:
- Pinkwashing (or rainbow washing): This refers to the practice of advertising support and sponsorship of the 2SLGBTQIA+ community, while in practice little is truly done within the organization to ensure 2SLGBTQIA+ employees are being protected from discrimination, prejudice, or harassment. For example, during Pride Month in June, many companies make contributions or sponsor parades; however, these same companies may also take very few actions the rest of the year to support 2SLGBTQIA+ communities or employees.
Pinkwashing has also been used to refer to companies that use the pink ribbons associated with breast cancer awareness to promote their products but provide little to no transparency on their involvement or production of products that are linked to causing breast cancer
- Purplewashing: This is when organizations deliberately attempt to appeal to the diversity and inclusion of women to distract from internal practices that may be inconsistent with this messaging. The most obvious examples of this are companies that run campaigns for gender equality but whose top-level management is mainly comprised of men with little to no representation of women.
- Brownwashing: This refers to when corporations create a public image of support for Black, Indigenous and People of Colour (BIPOC) communities, while doing little to ensure their own BIPOC employees are being protected from discrimination, prejudice, or harassment.
- Redwashing: This is when organizations (whether corporations or governments) show public support for Indigenous initiatives to divert attention from activities such as environmental contamination or the forceful appropriation of land and water rights.
Finally, the term whitewashing refers to a company's attempt to cover up its scandals with investigations that are carried out with minimal effort and/or presenting biased data.
While many organizations are making positive strides in ESG practices without first putting them "through the wash," stakeholders must continue to be alert for fraud risks that can compromise clean initiatives. In future posts, we'll explore how organizations can prevent, detect, and respond to ESG related fraud risks.