5 practical steps to navigating your ESG communications strategy

Written by Ben Baigrie, KAE Engagement Manager | September, 2024

The roots of ESG: A brief overview

Investors today increasingly consider Environmental, Social, and Governance (ESG) factors when making decisions. While the concept of socially responsible investing (SRI) began in the 1970s, the term ESG gained prominence in the early 2000s, reflecting a growing focus on issues like supply chain ethics, human rights, and environmental impact. At its core, ESG emphasizes that businesses should act responsibly, considering the interests of all stakeholders, not just investors - but with this, comes an added responsibility to communicate each company’s ESG strategy wisely - or else risking immense penalties, such as DWS’ $19 million settlement against greenwashing charges from the SEC in 2023.

ESG communication challenges: Greenwashing, greenhushing and greenwishing

As global ESG practices continue to evolve, some businesses are embedding ESG into their strategies faster than others. Although there are upfront costs, focusing on ESG can enhance financial performance and risk management. One key approach is leveraging sustainability credentials to differentiate from competitors, attract customers, foster loyalty, and secure better funding. However, effectively communicating these efforts can be challenging, as discrepancies between claims and reality may arise—whether intentional or not. Such misalignment can damage a business's reputation and impact its performance.

The most well-known example of this is greenwashing, a term coined in the 1980s by environmentalist Jay Westerveld to describe entities falsely presenting themselves as more sustainable than they truly are. The adverse impact of perceived greenwashing has been widely recognised and recorded across several recent studies. Some examples include:

1) A 2019 study published in the Journal of Marketing quantified that a 1% increase in perceived greenwashing could result in a 1.57% drop in brand loyalty.

2) Another study¹ found that firms accused of greenwashing experienced an estimated 1-2% drop in share price (on average) following a greenwashing scandal.

3) Furthermore, a 2022² survey found that 75% of institutional investors are wary of greenwashing and are likely to avoid investing in companies perceived to be making misleading environmental claims which can have a significant impact on access to capital.

A more recent term known as greenhushing has also made its way into ESG vocabulary.
This refers to any entity abstaining from sharing certain ESG related information or using its efforts in sustainability as a tool to market their products and services. Ironically, this often occurs because entities fear their actions being labelled as greenwashing. It too comes with its own risks as more widespread reporting around sustainability becomes the norm and withholding vital information can be detrimental - for example, in March 2024, the SEC issued a final rule that requires registrants to provide climate-related disclosures in their annual reports and registration statements, including those for IPOs, beginning with annual reports for the year ending December 31, 2025, for calendar-year-end large accelerated filers.

Greenwishing, seemingly innocuous in comparison to greenwashing, is a term used to refer to those expressing a desire to become more sustainable, but setting unrealistic targets and not having the means to take significant actions to bring about meaningful change and ultimately, hit said targets. The fundamental difference when comparing to greenwashing is the intent, whereby the former refers to a deliberate attempt to mislead others whilst the latter is unintentional, but some would argue negligence.

Steps to navigating ESG communication challenges

Step 1: Conduct a regulatory review

Understand the ESG requirements and guidelines that apply to your business to ensure compliance and avoid misleading claims.

Step 2: Perform a competitor analysis

Examine what your competitors are doing in the ESG space. Identify strategies that have succeeded or failed and learn from their experiences.

Step 3: Analyse and assess your stakeholder expectations

Gauge what your customers, employees, investors, partners, suppliers, communities, & NGOs value regarding ESG. Understand their expectations, dislikes, and the unique initiatives that could differentiate your brand and drive growth. Expect differences across consumer segments and markets. Engage with investors to understand their priorities around ESG performance and seek feedback from staff to ensure internal alignment and authentic communication. Staff views are often overlooked, but can be a great way to get internal buy-in, boost morale and retain and attract employees.

Knowledge in this area is best achieved through in-depth interviews, online surveys or a combination of both.

Step 4: Define/test/refine your sustainability strategy

After gathering and understanding the expectations of your stakeholders, you should be able to define, test, and refine your sustainability strategy - although this will remain a continuous process. Define the metrics and objectives that will help you stay true to this strategy until it is optimised once more.

Step 5: Develop an informed ESG communications strategy

Synthesize the insights from steps 1-4 to craft a transparent and compelling ESG communications strategy that aligns with regulatory requirements, market standards, and customer expectations.

Ensuring you communicate the right message in the right way is paramount, and the most effective method to empower your organisation and mitigate significant risk is by doing the necessary research. Also, do not be shy to consult experts in this area - at KAE, we help companies with the research and analytics needed to make better strategic decisions. When stacked up against the risks of failure in an ESG communications strategy such as reputational damage, the time and cost spent conducting refined research is worth the investment, every time.

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