The Centre for the Analysis of Investment Risk (CAIR) is to carry out a major study which will look at the extent to which companies ‘greenwash’ their ESG credentials.
There has been a step change in Environmental, Social & Governance (ESG) ambitions in recent years with corporations being increasingly keen to disclose such criteria. More than a third of companies in the FTSE All World Index having set one or more targets, while institutional investors have also signed a commitment to integrate ESG information into their investment decisions.
As a result of these trends investors increasingly rely on ESG disclosure and third-party ESG ratings to obtain an assessment of corporate ESG performance. And as the market for sustainable investing gains a firm foothold so ESG disclosure and ratings increasingly influence investment decisions.
However, critics argue that ESG and Corporate Social Responsibility (CSR) are defined by corporate interests that strengthen their influence and power, rather than meet societal expectations, and targets can be chosen that make the headline numbers appear more ambitious than the actual commitment. Scrutinising ESG disclosures and ratings is therefore increasingly important to separate credible ESG commitments from greenwashing.
In the study CAIR will make an in-depth comparison between ESG disclosure in UK companies and ESG practice (e.g., actual greenhouse gas emissions) to determine whether they are walking the talk. By exploring multiple attributes and measuring methods to analyse corporate ESG performance, it will develop an ESG assessment model and generate an ESG quality index.
Professor Paolo Quattrone, Director of CAIR, said: “Should the scrutiny of ESG commitments find practices contrary to disclosures, the impact would be significant since corporations would be in breach of their societal contract. The project will thus act as the catalyst to drive interaction, engagement, and consistency between both.”
The study will draw on expertise across CAIR ranging from decision science and evidential reasoning, through to data analytics, intelligent modelling, data mining and financial technology. This expertise will enable the team to conceptualise the research questions and hypotheses, model the organisational and investors’ behaviour related to ESG and CSR, construct essential measures needed for ESG profiling, and investigate the consequences of organisational ESG profiles.
The project, which is funded by The University of Manchester’s (UoM) Faculty of Humanities Research Recovery Funds 2021/22, will lead to an academic paper on the governance of ESG decision making to target major accounting and finance conferences and journals.
It will also lead to the development of a unique ESG quality index curated by UoM to support ESG governance by facilitating meaningful scrutiny and engagement. CAIR also intends to present its findings at the COP27 UN Climate Change Conference later this year.
CAIR has recently financed a number of new research projects covering subjects such as climate change, disclosure of modern slavery reports, dual-class listings, and corporate securities.