Demand for ESG expertise reveals ‘competence greenwashing’ risk

The recruitment drive for corporate sustainability and ESG experts has highlighted concerns about candidates misrepresenting their competence and experience in the field.

The challenges in identifying minimum standards in environmental, social and governance skills have led to the growing risk of “competence greenwashing”, as Kim Schumacher, associate professor in sustainable finance and ESG at Kyushu University, described it in a 2022 note.

Schumacher defined competence greenwashing as “the practice of equating immaterial ESG knowledge, basic sustainability awareness, or passion for ESG-related issues with subject matter expertise”, and argued that there was a disconnect between “professional ESG competence claims and the realities around the material expertise gaps of many so-called ESG experts”.

Elsewhere, research by the NYU Stern School of Business in 2021 also concluded that US corporate boards lacked the right skillset to address financially material ESG issues.

Knowledge gap

Understanding what ESG experience and skills are relevant has been a challenge for executive research companies too, in particular, when recruiting candidates for board roles.

“Some people are reframing every part of their career as in some way sustainability-related and we do have to watch out for that,” says Suniti Chauhan, a UK board practice member at headhunter Spencer Stuart.

From an academic point of view, Schumacher points out that the more substantial the sustainability claims of a company’s product or service, the more material the expertise in support of these claims needs to be, including from the team in charge of that product or service.

He warns against simply promoting someone internally who has some connections to corporate social responsibility to ‘head of ESG’ or ‘chief sustainability officer’, irrespective of specific skills or knowledge that may be required, in response to external pressures.

Schumacher created an “ESG skill materiality matrix” to visualise to what extent academic or professional achievements could be considered material to a few selected ESG areas.

Experts agree that ESG issues are highly dependent on the context in which a company operates and that no ‘one-size-fits-all’ approach can be applied.

Ranjita Rajan, executive chair of the Oxford Global Partnership and a business fellow at the Smith School of Enterprise and the Environment at the University of Oxford, proposes that corporate boards should hold a “double-materiality” approach and should couple the search for ESG experience with that for cognitive and socioeconomic diversity. 

Although Rajan recognises that this recruitment attitude is still at an immature state, she is confident that board directors in the future will individually and collectively possess – and be expected to possess – a foundational knowledge of their company’s non-financial ESG risks and responsibilities alongside the financial fiduciary duty the market has always expected.

Upskilling

One way in which candidates have attempted to scale up their knowledge on ESG topics is by attending courses and gaining certificates. Since 2019, the Chartered Financial Analyst Institute has issued a certificate in ESG investing, targeting the needs of practitioners in investment roles who want to learn how to analyse and integrate material ESG factors into their daily investment analysis. 

The CFA Institute says the course has seen particular demand from Asia over the last year, with the region accounting for 8100 registrations out of 25,000 registrations since the global launch in September 2021. Pass rates for the certificate are slightly in excess of 70 per cent.

Nick Bartlett, senior head of learning content at the CFA Institute, says the course aims to provide a foundational baseline rather than specialist knowledge but is regularly updated with the next version of the curriculum likely to feature issues such as greenwashing and biodiversity in more depth.

However Schumacher was critical of practitioners using ESG certificates as a way of relabelling themselves as climate or sustainability experts. Likewise, recruiters remain vigilant about putting forward candidates for roles based solely on these qualifications.

Executive search companies must examine experience, exposure and expertise equally to ensure they consider the widest range of, and most relevant, candidates, says Rachael De Renzy Channer, global head of sustainability at executive research company Egon Zehnder. Reliance on qualifications alone would unnecessarily diminish the talent pool available to clients, she adds.

Similarly, Chauhan at Spencer Stuart says experience and mindset are more important than qualifications: “Accreditation does not give you what most boards are looking for, which is the lived experience of undergoing a sustainability-focused transformation.”

Her focus is on how a candidate can demonstrate the impact they have had in a previous role – for example, adopting a new, more sustainable business model; divesting from an unsustainable activity; or overseeing a decarbonisation project.

Thorough interviewing and referencing are good ways to investigate a candidate’s ability to deliver change and oversight in a specific business, says De Renzy Channer.

Striking a balance

Experts stress that although the process of corporate sustainability integration and transformation is highly complex, it is also unique to each corporate board, since these are structured according to the corporate governance models of the countries in which they operate and the size of their business. 

Rajan is urging boards to be transparent about the limits of their own knowledge and to invest in collaboration and continuous learning. For example, she says, climate change risk as a vast and scientifically complex area, so “how can we assume that a board member with an ESG responsibility is a climate change risk expert?”

She says it’s important to strike a balance between avoiding and calling out greenwashing, while acknowledging that organisations, boards and individuals need the space to get things wrong, learn, and do better.

Based on her own teaching experience at Oxford, she expects board talent in the next five to 10 years to have a far better understanding of the drivers of sustainable value creation.

“We are seeing this borne out in the attitudes, educational and employment preferences of millennials and Gen Zs, whose focus is on what I term ‘whole systems’ value creation, rather than that of shareholder or even stakeholder value creation,” she says.

Photo credit: Monkeybusinessimages/Dreamstime

The article has been amended on January 30 to add Kim Schumacher’s current job title.