The trust gap: Why commitments need to be credible
Credible climate commitments can inspire trust in a company and its plan for addressing its carbon footprint. In contrast, organizations that claim to be environmentally friendly but lack a credible plan to support their claims—or, worse, are shown to be hindering climate action—risk accusations of greenwashing.
Greenwashing can lead to multiple negative consequences, including the erosion of trust with stakeholders that may question (possibly rightfully) an organization’s capabilities or intent to reduce its climate impact. This lack of trust can negatively affect the organization in multiple ways, such as increasing the company’s cost of capital, thus reducing valuations and making it more difficult to attract investors.6 Some or more potential partners and consumers may reconsider buying the company’s products and services, and it could become harder to attract and retain top talent who demand that their employers demonstrate commitment to sustainability.7 More broadly, real or perceived greenwashing by peers—and the erosion of trust it engenders—may threaten the allocation of capital toward even climate-forward enterprises. In short, a broken pledge can threaten an organization’s very societal license to operate—or even its actual license to operate or its viability as a business.8 Importantly, research suggests that the inverse is also true with respect to ESG issues broadly: Companies that take significant credible action on material sustainability issues—those considered to significantly affect a company’s financial performance—outperform their competitors.9
And as expectations rise along with urgency, any organization—even one with a solid track record—is vulnerable to losing its stakeholders’ trust. This is true regardless of where a company is in its climate posture. Those organizations with no track record yet, or those seen to be implementing climate efforts to check a box, may be first to receive scrutiny from stakeholders, but even the most committed and advanced are also at risk of losing trust if they are unable to implement necessary plans or ensure appropriate transparency over their efforts—or if expectations increase and they struggle to respond appropriately. Some companies may have sincere intent, wanting to deliver on their climate commitments, but fail to execute. Others may not push for sufficiently ambitious goals. These actions or inaction can weaken stakeholder trust.
There are many examples of companies that might be surprised to be accused of greenwashing. A bank that has invested considerably in its climate commitment program—and is pursuing emissions reductions in alignment with science-based targets—could still come under scrutiny by its stakeholders and in the media for continuing to lend to fossil fuel producers. A clothing company that invests heavily in reducing its carbon footprint and launches an extensive advertising program to promote its sustainability credentials might face criticism after a news story revealing that its largest supplier relies on coal-fired energy.
Just a few years ago, few stakeholders would have questioned these companies’ climate commitments, but as the urgency surrounding climate change intensifies, expectations for corporate climate action are likely to grow. What was once considered sufficient climate action soon could be considered insufficient, potentially placing an organization at risk of being accused of greenwashing if its marketing messages and broader corporate communications, annual reports, and investor presentations are not adjusted to acknowledge higher stakeholder expectations.
Stakeholders’ climate expectations are on the rise
One major obstacle to building credibility with a range of stakeholders: Everyone has their own interests. Different stakeholders evaluate the trustworthiness of a company through the lens of what matters most to them, and climate commitments are no exception. Here we briefly profile some of the expectations, motivations, and influences of four stakeholder groups: investors, customers, employees, and NGOs.10
For many companies, investors are the most directly influential stakeholder group, and climate change risk is an increasingly significant driver in investment models.11 In a recent survey, institutional investors overwhelmingly (86%) cited climate change as the most significant ESG factor influencing investment decisions; the next-highest factor was a distant 45%. With ESG risks and opportunities driving more investor decisions, expectations are rising for companies across sectors to deliver more robust climate commitments and performance.12 Investors need consistent and credible information regarding an organization’s climate commitments to make decisions. They increasingly expect climate commitments that are science-based and linked to the organization’s core business strategy and decision-making.13 They require that climate-driven risks are presented clearly, that the company’s business model and strategy account for these risks, and that there are comprehensive plans and processes to respond to those risks and achieve stated target greenhouse gas (GHG) reductions in line with the objectives of the 2015 Paris Agreement.14 They also demand transparency and consistent reporting in the company’s overall commitment narrative and financial statements, as well as in nonfinancial disclosures. The latter continue to evolve, especially through the moves by the IFRS Foundation to develop global sustainability standards.15
Investors are motivated to assess and measure the impact of climate change on current and future corporate performance; they need data allowing them to better allocate capital for long-term risk-adjusted returns. Multiple risks exist, including the physical risk to the business due to the impact of climate-driven events such as floods or wildfires as well as the transition risk to the business as the economy decarbonizes and, for instance, fossil-fuel-based resources lose asset value. Investors are also increasingly motivated by the opportunities associated with climate-aware business strategies,16 with ESG-based investments often outperforming more-traditional strategies.17
Influence is being applied both by individual investors, some of whom are taking on activist roles and pushing for stronger climate action, and investor-led initiatives, the latter of which are rapidly growing in size and influence. Climate Action 100+ has so far enlisted more than 540 investors and is engaged across 33 markets, representing more than half of all global assets under management.18 And more than 70 asset managers recently signed a pledge with the Net Zero Investors Initiative, which formed in December 2020; signatories have committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner and include some of the world’s largest asset managers, such as BlackRock and Vanguard.19
A climate commitment that investors judge to be sufficiently credible can build trust not only with the investment community but also with other stakeholder groups; NGOs, regulators, and others pay attention to and take cues from rigorous investor sustainability ratings and assessments.
Consumers and customers
Consumers are often on the receiving end of greenwashing and are less equipped than other stakeholders to gauge compliance or exert pressure.20 But like investors, they are growing increasingly aware of companies’ sustainability commitments and follow through—and as COVID-19 eases, they’re looking for companies to continue pandemic-based progress in reducing their carbon footprint. In one recent study, more than 60% of respondents said that “companies have the opportunity, due to the pandemic, to be more thoughtful about how they incorporate sustainability into their business models moving forward.”21 Enabled by social media and digital communications, consumers can mobilize and turn against a particular brand quickly, which makes it important that companies engender trust in this stakeholder group. While they are less likely to examine the risks of climate change to a company’s business model, they are becoming increasingly cognizant of environmental marketing buzzwords that aren’t prepared in accordance with recognized standards or objective measures.
Consumers increasingly want to purchase products they view as sustainable.22 They also want to believe that their consumption habits won’t negatively affect the environment, and they are fearful of the overall impact of climate change. In an April 2020 study of citizens across 14 countries, with the pandemic spreading, more than 70% saw climate change as a long-term crisis as serious as COVID-19.23 The increasing press and cultural attention to the climate challenge will likely increase consumer focus on the sustainability of specific brands and products.
Scrutiny is hardly confined to consumer-facing businesses. In business-to-business relationships, the focus is rapidly shifting to sustainability performance across the supply chain. Many of these customers are making their own climate commitments, which lead them to develop codes of conduct for their suppliers and monitor risks and performance across their suppliers.
Employees are an increasingly vocal and expectant stakeholder group across all geographies.24 While workforce activism appears more noticeable for some sectors such as technology, it is expanding.25 Nearly 40% of millennials cite employer sustainability as a factor in deciding where to work; a recent survey shows that seven in 10 US job seekers care at least somewhat about a potential employer’s environmental record.26 In 2019, 85% of employees said they would hold their employers more accountable for their impact on the environment, a 13-point increase from prior year.27
Increasingly, employees of any age want to be part of an organization they see as contributing to the greater good. Many are motivated by a sense of their own purpose as well as by the recognition that climate change poses a risk to the organization and the community. Most also expect organizational leaders to take action.28
NGOs and activists
NGOs and activists, from veteran organizations to young protesters, have a wide range of expectations and approaches to influencing corporate climate action. Some nonprofits such as the World Wildlife Fund and World Resources Institute have operated for decades, partnering with corporations to drive climate action. Other activist organizations may take a more confrontational approach, and, in some cases, stage elaborate events to publicly shame particular companies. Still others use legal action to effect change.29
Whatever corporate leaders’ good intentions, few robust corporate climate actions happen without NGOs’ involvement or influence. The experts we interviewed emphasized how NGOs have been instrumental in setting common benchmarks and standards, providing pathways and best practices toward reducing emissions, and offering objective assessments of progress—or lack thereof. Active engagement with one or more NGOs is increasingly becoming a requirement for credible corporate climate action.
At the same time, an increasingly vocal and influential climate activist community can take some of the credit for pushing climate change to the top of the global agenda.30 Climate strikes and other highly visible actions from various groups have captured global attention and galvanized opinions. Some are well attuned to any effort to greenwash, obfuscate, or distract from actions they see as necessary to avert a climate catastrophe and ensure a just and equitable transition.
Considering stakeholder expectations collectively
Stakeholder pressures are dynamic and evolving. To build and maintain trust in their climate actions, companies need to be ready to respond to issues, both expected and unexpected. Figure 2 offers a summary of the stakeholder groups discussed and their typical motivations and expectations of company climate commitments. While each of these groups is wide-ranging and diverse, and their positions vary, having a general understanding of how the different groups view climate commitments can help companies to tailor and communicate climate actions effectively.