Fake Net-Zero, Fake ESG - Greenwashing Alert

 The Rise of Net Zero and ESG: The Temptation of Greenwashing  

As if in keeping with Benjamin Franklin's famous line, " Grow up by doing good," "Net-Zero" and ESG (Environmental, Social, and Corporate governance) have definitely become hot topics. Management once prioritized the environment or climate change in order to improve the company's image or to fulfill their social responsibility, but today it is an issue that is tied into profit and loss calculations for growth. The U.S. Apple declared that its supply chains and products would be 100% carbon neutral by 2030, and Kakao and NC Soft established separate ESG committees in Korea. SK Group affiliates joined RE100 last year, a global initiative aiming to achieve 100% renewable energy for the first time in Korea.

This is relevant to the evolution of consumption culture. There has been a noticeable increase in environmental awareness, and a greater number of consumers are willing to purchase products from good companies even if those are more expensive. Such a growing preference for "green" consumption has led to companies expanding their eco-friendly marketing efforts.

However, this trend does not always produce the desired results. The reason for this is that "greenwashing," the practice of using false, exaggerated, or misleading information in marketing, is frequently discovered. In one famous case, a cosmetic company sold its products in plastic bottles after merely changing the label to paper, and adding the word "Paper bottle" to make consumers mistake it for a paper bottle. 

The same goes for ESG. When an investment is made based solely on ESG considerations, without a standard, it may lead to a "green bubble" that overestimates the actual value of the business. In particular, following the COVID-19 crisis, ESG bond issuance to stimulate economies has surged in countries around the world, raising concerns about "ESG washing.” In the same way as greenwashing, it refers to instances where ESG investment strategies are opaque, or asset management fails to match expectations. For example, although Danish wind power generation company Ørsted has not performed well over the past few years, the company's ESG portfolio has made investing in it a foregone conclusion across the globe. Thus, management and investment decisions require careful examination of whether there is a substance involved.  

A case of greenwashing in response to climate change

There has been a recent trend among petrochemical conglomerates to declare net zero. What's behind this trend is a market shift toward climate change.  It is no exaggeration to say that companies most responsible for climate change, such as those in the oil, gas, and steel industries, are now at a crossroads of survival at a time when market changes are evident. Companies in the IT and general sectors can adapt to climate change by using new production methods or management patterns based on digital platforms, but not companies whose corporate purposes are directly associated with greenhouse gas generation. Consequently, greenwashing is more tempting for these companies.

Greenwashing comes in several forms. In some cases, 'net-zero' or 'carbon neutral' are declared, but there is no substance, the scope of net-zero activities is narrowed cunningly, or the goal is just too grand to be achieved. In other cases, decisions made for other business reasons could be framed as if they were taken for decarbonization.

In the case of BP, it changed its name from "British Petroleum" to "Beyond Petroleum" in an attempt to alter the image of the company. The company committed to net-zero by 2050, followed by other major companies such as Royal Dutch Shell, Total, Exxon, and Chevron. However, if one looks closely at their goals, it appears that some deceitful efforts have been made to frame these goals differently from the truth. It is because their products still contain natural gas, a fossil fuel, or a significant portion of their plans is dependent on CCS, which is still far from commercialization.

As for Shell, which has also announced net-zero ambitions by 2050, uses "carbon intensity" as a metric, not "greenhouse gas emissions." The current plan forecasts a reduction in intensity by 2030, but it is expected to eventually result in increased production of natural gas by 20%. Hence, a Dutch court ruled recently that Shell's plan was not sufficient to achieve net-zero and that the absolute amount of emissions should be reduced.

Southern California Gas (hereafter referred to as "SoCal Gas") is an American utility company that only provides natural gas services. Due to the abundant natural gas reserves in the U.S. and the fact that natural gas generation emits far less greenhouse gases than coal, gas companies are often big supporters of natural gas, calling it a "bridge fuel" that enables an energy transition to cleaner energy in the future. In the end, however, this claim is also nothing more than greenwashing in the face of the complexity of achieving net-zero. SoCal Gas recently announced reforms and used the ambiguous term "renewable natural gas." The idea is to replace the current gas demand with biomethane generated from livestock, food waste, and sewage treatment plants. While it seems plausible at first glance, these facilities cannot avoid criticism for greenwashing since not only air and water pollution problems persist, but also only a small portion of the total gas demand can be met.

In Korea too, SK Innovation has recently caused controversy. While it announced it would sell a shale gas mine in North America to strengthen ESG management, the true motive behind the sale was driven by the fact it had been in deficit for years. In other words, the company would have sold the mines anyhow due to their low value, but promoted it as a decarbonization strategy.

The practice of greenwashing is not exclusive to private companies. The government and public enterprises also frame climate change policies without substance. This is due to increased pressure from the international community and civil society on taking action against climate change.

The 2021 United Nations Climate Change Conference (COP26) will be held in the UK towards the end of this year. Eco-friendly organizations, however, have criticized the British government for greenwashing the image of companies that do not adopt eco-friendly practices. Reckitt, selected as the main sponsor, is the parent company of companies that produce cleaning and air freshener products that we are familiar with, such as Dettol and Air Wick. The problem is that this company has not taken a proactive stance on climate change. In fact, palm oil is known to be consumed in huge quantities in producing its products, and this palm oil production leads to the tremendous destruction of forests and land.

The same is true of the governments in all countries that made net-zero statements recently. South Korea has declared net-zero, but some experts are concerned about how it will achieve it. With an operating asset of 785 trillion won, the National Pension Service ranked first in financing the domestic coal power generation industry (based on 2009-June 2020), and KEPCO was at the center of controversy for pressing ahead with investment and support to Vietnam's coal power generation business despite various criticism.

The case is similar in China. In the first half of this year, despite its goal for net-zero, China's greenhouse gases generation has shown the steepest increase of any country in the world. Further, as with Korea, China has no choice but to face criticism since it began investing in coal-fired power plants in developing countries. While China reluctantly made its declaration with the international community in mind, it is delaying its action for practical reasons.

The key to preventing greenwashing: Transparency

Then, how can this greenwashing practice be prevented? To combat the practice of greenwashing, governments of each country are preparing a variety of measures to protect consumers. In a number of countries, marketing falsehoods including greenwashing can be penalized by law. For example, "Consumer Protection from Unfair Trading Regulations" enacted in 2008 in the UK is the basis for such regulations in the country, and a fully-fledged guideline on greenwashing will be released this summer by the Competition and Markets Authority (CMA). Also, the French government decided recently to impose a fine on greenwashing for the first time in history.

Around 2013, there was a strong need in South Korea to establish guidelines to prevent greenwashing, but there was little action taken.  K-ESG, a Korean version of the ESG evaluation guideline, is planned for this year as ESG is receiving attention, but future performance, such as whether it meets international standards, needs to be monitored.

Government regulations or guidelines alone cannot prevent greenwashing. In the recent K-ESG indicator evaluation, POSCO came out on top, causing people to doubt. POSCO is the largest emitter of greenhouse gases in Korea, not to mention that it is currently constructing a coal-fired power plant in Samcheok. Then, if POSCO puts forward the top ranking in K-ESG, it will only encourage greenwashing. 

Therefore, what is ultimately required is to lay the groundwork for economic actors to make objective and transparent judgments about net-zero and ESG. That is to say, anyone proclaiming such goals must be able to use objective data to determine whether their goals are valid.

Criteria for evaluating net-zero goals are their scope, method of achievement, and transparency. In other words, matters such as the types of greenhouse gases involved, specific activities that must be reduced, and the timeframe must be considered. Upon declaring its intent to achieve net-zero by 2050, a company would need to check whether there are subsequent plans in place. It is also essential to consider how greenhouse gas reductions, removals, and offsets can be combined to meet net-zero commitments.

Furthermore, it is necessary to determine if there is a mechanism for monitoring activities transparently up until the net-zero goal is attained. There are also tools that can help with evaluating and monitoring. These include the Carbon Disclosure Project (CDP), which discloses governance and strategies relevant to greenhouse gases and climate change, Science Based Targets initiative (SBTi), which provides technical methods to reduce greenhouse gases, and the Greenhouse Gas Protocol, which supports greenhouse gas reduction in a standardized manner.

On the other hand, a universal standard does not yet exist for the ESG.  European Union’s ESG-related legislation, which has recently been strengthened, could serve as a model. As an example, the Sustainable Finance Disclosure Regulation (SFDR) developed by the European Commission requires financial market participants to evaluate and disclose sustainability-related data and policies at various levels. Likewise, a Task Force on Climate-Related Financial Disclosure (TCFD) also seeks to disclose consistent and standardized information. The two are distinguished by the fact that TCFD is a recommendation focused on climate change whereas SFDR is concerned with sustainability in general. The release of data in these ways facilitates market participants in evaluating the validity of an ESG goal.

Only recently have government and private sector efforts been made to deal with climate change. Thus, they are busy making resolutions, declaring, and promoting to follow the trend. Nevertheless, making unattainable promises is nothing more than greenwashing. For the carbon-based economy in place today to be transformed into a fundamentally sustainable one, the system itself must be able to drive out disguised environmentalism. This is why measures to increase transparency are so important, such as strengthening the obligation to disclose ESG data relating to carbon.