Greenwashing in India Inc: Environment scores create a sense of suspicion

Companies' disclosures should be verified by a single unit under Sebi to avoid disparity in methods

When hotels encourage their customers to re-use towels to reduce ecological damage, the perceived marketed view is of environmental consciousness, but the actual reason could be traced to saving cost. The phenomenon, called greenwashing after being coined by environmentalist Jay Westerveld, has been creating a furore in the sustainability strategies of corporate entities. The corporate sector has often faced tremendous regulatory pressure for improving transparency and disclosure norms on their environmental performance as well as usage of environment-friendly products. In this quest for forced environmental consciousness, there has been a mismatch between the oral claims and actual execution of sustainable practices, both at the firm level and at the product level. This could be associated with the selective information disclosure about the product and service delivery or through decoupling behaviour meant for symbolic satisfaction of stakeholder requirements, in a bid to improve corporate legitimacy.

 

To detect greenwashing, researchers have often used the difference between the Environment and Social Governance (ESG) ratings disclosure and performance scores of firms relative to their peers. The key disclosure indicators include direct carbon emissions, total energy consumption, total water use, hazardous wastes and workforce related issues. Alternatively, the difference between the absolute disclosure ratio and weighted disclosure ratio has also been used to examine the extent of greenwashing where the former reflects how many of the relevant environmental indicators are disclosed by the company regardless of their relative importance while the weighted disclosure ratio shows how much of the most important information was disclosed.

Regulators’ take

While product-level greenwashing through misleading advertisements and unfair trade practices has often been taken to task by the government and its department of consumer affairs, the macro-greenwashing phenomenon still remains hidden in the garb of ESG disclosures. The Securities and Exchange Board of India (Sebi), through a series of piecemeal regulations since 2012, has been able to push for mandatory ESG-related information among the top 1000 listed companies from the Financial Year 2022-23 (FY23) onwards. The 'Business Responsibility and Sustainability Reporting' circular (BRSR) by Sebi in 2021 introduced several principle-based performance indicators, wherein the concerned Principle 6 pertains to the protection and restoration of the environment by Indian entities. These voluntary disclosures include information related to energy consumption, water usage, carbon emissions and waste generation. The role of Reserve Bank of India (RBI) through proper monitoring and screening in identifying the “green washers” is significant in a bid to scale up sustainable finance and credit facilities in green projects. Recently, the RBI collaborated with the Global Financial Innovation Network (GFIN) along with other international regulators, aimed at mitigating the risks of greenwashing in financial services.

With India’s target to achieve net zero emissions by 2070 and to meet 50 per cent of its electricity requirements from renewable energy sources by 2030, the private sector assumes great significance in mapping their business objectives with the government’s ambitions. The race among the top market capitalized companies in achieving carbon neutrality has been grabbing headlines of the annual reports with most of them committing to achieve the target in less than half the time that is targeted by the government. Given the current state and rate of emissions, the lofty targets might be a difficult proposition for some companies in the financial and manufacturing sector, even though others like Infosys are already sitting pretty on the top, having achieved carbon neutrality for four years in a row. A notable feature among the environment indicators has been that the magnitude of improvement has been slightly higher in the case of emissions compared to energy intensity. This is reflective of the fact that India Inc. has to invest more resources in adoption of more renewable sources of inputs to improve their energy intensity as that would automatically translate into greening the entire supply chain paradigm. The commonly used measuring rod for capturing the overall environmental consciousness of the companies has been the ESG ratings, even though critics like valuation expert Ashwath Damodaran claim that they only serve a feel-good factor rather than being potentially good. While the limited focus of environment in the otherwise bloated ESG scores used to be the norm, the sudden spurt in weightage of environment scores certainly creates optimism, with a sense of suspicion.

Road ahead

Even when the Sebi (2021) circular on BRSR made filing of the report mandatory for the top 1000 listed companies from the financial year 2022-23, data for some companies is yet to be updated. Further, while some firms report scope 3 emissions in addition to scope 1 and 2 emissions, others do not report it. Thus, the heterogeneity in reporting standards by the companies calls for a standardized norm for reporting by firms. An estimation of the change in emissions with respect to change in energy consumed helps in identification of greenwashing to account for the base effect of energy usage by the companies. Moreover, firm disclosures should be verified by a single unit under Sebi to avoid disparity in the methods of verifying the credentials. The ESG reports of the high market valued companies show that most of them score below 50, with ICICI and Hindustan Unilever performing very low in environmental aspects. However, the improvement in their emission level narrates a different story. 

This could point towards a situation aka “brown washing” where firms under report their green stance especially in times of financial stress, while succumbing to investor pressure. Alternatively, absolute difference between the change in emissions and change in energy consumed with respect to their level of market capitalization that represents their capacity to reduce environmental damages should be taken into account to identify greenwashing. A medium-term energy consumption and emission statement, with clearly laid out commitments and rolling targets for energy indicators, along with specifications of underpinning assumptions and risks could add value to the existing reports.

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Bhattacharya is fellow, Indian Council for Research on International Economic Relations; Chakrabarty is assistant professor, O P Jindal Global University