Dr Kim Schumacher is a Lecturer in Sustainable Finance and ESG at the Tokyo Institute of Technology. His research focuses on ESG data and impact metrics, sustainable finance frameworks, green bonds, natural capital valuation, ecosystem services, renewable energy project development, and TCFD disclosure. He is also a member of the Technical Working Groups of the Climate Disclosure Standards Board (CDSB), the Climate Bonds Initiative (CBI), the ICMA Green Bond Principles, and the Green Finance Network Japan (GFNJ).
As a sustainable finance expert, Dr. Kim Schumacher has lately been very vocal on the topic of ESG competence greenwashing.
On sustainabilitynews.eu, the topic itself is not new. In a recent article Gábor Gyura from the Central Bank of Hungary named ESG competence greenwashing as one of the top three risks financial institutions face when they try to improve their ESG performance.
Where does the term ‘ESG competence washing’ originate?
To understand the topic and the risks associated with it first we need to look at the historical context and the exact meaning of the terms ‘ESG competence greenwashing’, a term originally coined by Dr. Schumacher in February 2020.
As Dr. Kim Schumacher explains “It started in pre-Corona times when the Fridays for Future and Greta Thunberg were in full swing. Everybody was getting involved in sustainability and every company started to develop an environmental consciousness.
Consequently, a lot of organizations also felt they were left behind by their peers. They wanted to communicate quickly that they were sustainable as well, but they did not have anyone inside the organization who was in charge of sustainability.
So how do you fill that gap? Either you start to look inside the organization if there is somebody with a sustainability profile. If there is not, then you can start to train someone – which takes time. Or you can also hire somebody – but it takes money.
Consequently, what a lot of companies did was that they simply nominated somebody as Head of ESG who just used to be responsible for some CSR activities. “
Awareness is not expertise
Additionally, the corporate and financial sectors are also going through a transition. This is very similar to the transition coal dependent regions in Central Europe, for example Poland or some parts of Hungary, face. People there will lose their traditional jobs as a result of the transition but at the same time new jobs will also appear.
Transition in the financial sector means that a sector that was purely or at least majoritarily financial before suddenly has to take into account many things, including social and governance aspects.
“So practitioners, for example financial analysts, started to build capacities that they did not need before – primarily to show the market they have the skills that are now required by the market. This can be in the form of certificates or trainings, etc.
These certificates of course have value. But we have to be very careful with what we are calling ‘expertise’. Just because I am interested in climate change, this does not make me a climate change expert.
We should not equate awareness or passion in sustainability or ESG with subject matter expertise.
Also we need to acknowledge that ESG expertise requires specialist knowledge”, Dr. Schumacher explains.
The customer perspective
The question can be of course if ESG competence greenwashing is a problem at all or not? And the answer can be probably given from the customer perspective.
As Dr. Schumacher points out: “When I want to invest in ESG products as a customer then the bank tells me ‘we have an entire team dedicated to ESG’. But what if I find out that none of them has specialist knowledge – for example energy or climate knowledge, and they still invest in renewable funds? As a customer I would expect them to rather have specialists in those areas.”
But from the customer perspective there is also the question if we want to have real ESG or not? One example here from Dr. Schumacher is organic food in discount stores.
Organic food is usually more expensive than normal food. And of course, some organic food is also sold by discount chains. The question is how low the price of organic food can be reduced, to still be considered organic according to regulations, but at the expense of losing its genuine, organic attributes.
“The same is with ESG and sustainability.
There are some things which you can technically claim are ESG but, based on the underlying things, you know they are not.
Because you need to have certain things in place in terms of technical and knowledge capacities.”
Solution: create the right mix of expertise
Of course, every problem of ESG competence greenwashing can be avoided or solved by the corporate sector and by financial institutions. One solution is to create the right ESG teams that can serve the company and the customers as well.
“ESG teams of the future should have 50% financial experts and 50% non-financial experts. You need to have both. Currently the ratio in ESG is finance-heavy and it is rather 80% financial experts. This shows that the focus still lies with traditional financial performance and not with ESG integration.”
Solution: Minimum criteria for ESG competence
Besides team composition we also need to define the knowledge required from specialists in the team.
“One problem with ESG is that there is still no definition about what the minimum criteria are that we have to meet in terms of capacities. We more or less know what the business activities are that are green and the ones that are not. But we do not have an equivalent yet about what are the required ESG capacities.”
“At some point we will need to define a minimum baseline of knowledge that everyone who wants to use the term ‘ESG expert’ or ‘Sustainability expert’ must have. Like an EU taxonomy for ESG competence.”
Dr. Schumacher also added that even after developing or hiring this expertise, companies will still face the challenge of integrating experts into an organization that is primarily financially focused. This is especially relevant for the financial sector.
Lessons for CEE companies
Of course on sustainabilitynews.eu we cannot forget about the lessons for regional companies either. The basic assumption is that some companies in the CE region are still behind their Western European peers in terms of ESG and sustainable finance. Or, they are just starting with ESG integration.
Hence, we asked Dr. Schumacher about what the most important aspects are to keep in mind for companies who plan to build up ESG competence or an ESG team in the region, especially in the financial sector. His recommendations are the following points:
- “If you start from scratch, then creating more awareness in the entire organization is never wrong as a first step.
- If you are a large organization and you have the resources, start building a team with genuine ESG experts. Take somebody internally who knows the organization but also be aware that you need people with actual non-financial subject matter expertise and material ESG expertise.
- Do not hire somebody solely based on ESG self-labeling or ESG-related certificate acronyms in their CV. Look at their actual education and track records in ESG.
- Try to build a diverse team, comprising for example finance and natural science experts, because that lead to mutually beneficial cross-pollination effect. Different people with different backgrounds can learn from each other.
- If you are a small organization and do not have the resources, then try to start collaborating with the research sector. They often have non-financial specialists – maybe not with a business orientation but they can provide you with the material technical knowledge.”