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AS COVID-19 CONTINUES to pose a threat to Canadians, the various approvals of vaccines in countries around the world offer a glimmer of hope that we will eventually leave this pandemic behind. While we can see a faint light at the end of the COVID-19 tunnel, we are only just beginning to grapple with the other issues 2020 laid to bare, including inequities related to race and income; an increasingly toxic and divided political environment; and, as we saw with the devastating fires in Australia, the rising threat of climate change.
It would be reasonable to assume that Canadians’ concerns regarding climate change have taken a back seat to ones more directly tied to COVID-19, such as healthcare and the economy. However, according to a recent survey by the Canadian Centre for the Purpose of the Corporation (CCPC), Canadians perceive climate change as a greater challenge than both of those issues.
It’s not a challenge that will be solved in legislatures and thinktanks alone. It requires a shift in thinking from big business and institutional investors. We are seeing exactly that.
“Accusing a company of greenwashing, the practice where unsubstantiated claims are made to make an organization appear greener than it is, has become a powerful rhetorical device that has, fairly or not, been leveled against virtually every corporate sustainability effort.”
Canadian equity giant Brookfield Asset Management formed a US$100-billion fund focused on combatting climate change, spearheaded by Former Bank of England and Bank of Canada Governor, Mark Carney. Net inflows into Canadian exchange-traded funds (ETFs) that track companies focused on environmental, social and governance (ESG) factors grew to $740 million, an amount that far exceeds the $142 million invested last year and the $200 million invested in 2018, excluding seed capital. In the United States, $4.2 trillion of assets under management incorporated climate change specific criteria—a 40 per cent increase from 2018 and by far the largest number in absolute terms compared to any other ESG category.
There is no doubt that there has been a substantial shift in corporate mindsets and strategies in favour of sustainable investing. What remains less clear for ESG-conscious investors is how to differentiate between legitimate corporate sustainability efforts and greenwashing.
Accusing a company of greenwashing, the practice where unsubstantiated claims are made to make an organization appear greener than it is, has become a powerful rhetorical device that has, fairly or not, been leveled against virtually every corporate sustainability effort.
When the everyday person thinks about large, multinational corporations and the environment, their key reference points are the most well-known cases where corporations mislead the public about their environmental efforts and standards (think the BP oil spill). As a result, the baseline assumption for many is that any environmental effort touted by a large company is likely a PR stunt and will not have a real impact. For companies with genuine commitments to fighting climate change, overcoming this baseline assumption is a challenge.
“Greenwashing” has held onto its rhetorical power, even as private emission-reduction initiatives significantly improve, in large part due to flaws in the systems that regulate how companies report and enforce their emission-reduction efforts. Lack of transparency, standards and clear enforcement mechanisms in sustainable finance have enabled bad actors to take advantage of the system, further discrediting corporate sustainability efforts.
A clear example of this is the carbon offset market. A carbon offset is a credit for emissions reductions given to one party that can be sold to another party to compensate for its emissions. An offset can take many shapes and forms, such as financing a wind turbine generator or restoring a section of a tropical forest. Major companies such as Amazon, Delta, Disney, and countless others buy carbon offsets to help offset their net emissions. It is estimated that carbon offset projects cover 359 million tons of CO2 a year, more than France’s annual emissions. The carbon offset market is likely to grow even more due to the over 170 companies who have pledged to become carbon neutral by 2050.
Carney and other proponents view carbon offsetting as simple and relatively cost-effective way for individuals, corporations, and governments to offset emissions and believe it’s a critical component of the climate solution. Conversely, critics view purchasing carbon offsets as greenwashing because they, in their minds, provide an easy way for companies to look like they are fighting climate change without actually reducing the emissions they produce.
These criticisms stem in large part from bad actors who have taken advantage of a lack of uniform standards and enforcement mechanisms, making the line between what is a legitimate corporate sustainability effort and greenwashing extremely blurry. Different offset programs have different standards and best practices. This makes them difficult to uphold and opens them up to fraudulent activity and interest rate-style manipulation. For instance, there are multiple cases of businesses in China and other countries who have deliberately increased their greenhouse gas emissions for the sole purpose of getting paid to reduce them.
More common, though, are examples of companies, both knowingly and unknowingly, inflating the level of environmental impact carbon offsets. GreenTrees, the largest carbon reforestation project in North America, pays landowners to plant trees on their croplands, calculates the carbon absorbed as a result, and then sells credit for the carbon reductions to large corporations. GreenTrees has been accused of taking credit for trees that were already planted or would have been planted anyways. If true, not only would this mean that its emission reductions claimed are inflated, but also those of the corporations who bought credits from GreenTrees. Furthermore, for investors who purchased shares of these companies as part of an ESG investing strategy, the environmental impact of these investments would likely be far less than they believe.
GreenTrees is one of many examples that illustrate how a lack of uniform standards and regulatory oversight hurts the legitimacy of the offsets market. Corporations and investors can somewhat mitigate the risk of purchasing offsets with inflated emission reduction claims by consulting with auditors or standards groups like The Gold Standard or Green-e. However, this alone won’t solve the carbon offset market’s credibility issues.
Regulators, corporate executives and large investors must work together to set universal standards, terms, verification processes and disclosure policies for selling and purchasing carbon credits. Unless proper standards and enforcement mechanisms are established, greenwashing claims will continue to be legitimized and investors and corporations will lose confidence in the effectiveness of carbon offsets, removing a critical tool that has real potential to help corporations and policymakers to meet aggressive climate-change targets.