Introduction to ESG I

Businesses today are under increasing pressure to demonstrate responsible behaviour, particularly in relation to their environmental, social, and governance (ESG) responsibilities. "Bad behaviour" within ESG encompasses actions that harm civil society, including environmental damage, mistreatment of workers, exploitation of labour, and neglect of basic human rights. For example, it includes environmental exploitation, forced labour, and unethical marketing practices.

ESG reporting aims to promote transparency in how organisations report their impact on "public goods" like the environment, climate change, and human dignity. The three key components of ESG are Environmental (E), Social (S), and Governance (G), representing responsible conduct in these areas.

"Greenwashing" refers to businesses exaggerating their green credentials and falsely portraying their products, activities, or policies as environmentally positive. Legal actions are taken against organisations making false ESG claims. Governments and regulators are introducing new ESG standards to assess organisations' ESG responsibilities and to uncover instances of greenwashing.

In financial markets, stakeholders, especially professional investors, are concerned that false ESG claims can lead to an overvaluation of businesses, creating a "green valuation bubble" that risks causing a market crash when it bursts. They are motivated by practical and commercial reasons to ensure the honesty of ESG claims.

Stakeholders like human rights activists are primarily motivated by ethical concerns and a commitment to basic human decency. 

Employment lawyers seek early warnings about companies potentially facing class action lawsuits for exploitative behaviour. Challenges from these groups can have significant legal and regulatory repercussions for businesses.

Independent research suggests that many investment firms claiming to be "climate positive" do not comply with ESG standards, highlighting a need for more rigorous research and auditing to substantiate ESG claims. To counter this, the U.S. The Securities and Exchange Commission (SEC) has initiated a task force to identify and call out false claims of ESG as "misconduct," described as anti-greenwashing. Regulatory bodies are forming alliances globally to prosecute public companies engaged in greenwashing. For example, the SEC collaborated with the German banking regulator BaFin to challenge ESG statements made by Deutsche Bank's investment business.