Covalence Switches On Sincerity Detector

    Stockholm (NordSIP) – Investors and regulators increasingly sound the alarm about companies that seem to be exaggerating or misrepresenting their environmental credentials. Suspicions apart, greenwashing can be challenging to detect, quantify, and monitor in a systematic way. Lately, however, advanced technology has joined the fight against greenwashing. University professors from Dublin to Zurich have been busy developing artificial intelligence guardians, such as GreenWatch and ClimateBert, ready to assist human analysts in unveiling corporate cheaters.

    Geneva-based ESG data provider Covalence is yet another actor proud to enlist the help of AI to track inconsistencies between a company’s promises and actions regarding sustainability. On 22 August, the company published a whitepaper describing the greenwashing risk indicator they have developed to enhance their current ESG rating system. According to Covalence, the new indicator is a kind of “sincerity detector”. It offers a more realistic picture of companies’ ESG credentials while enabling investors to assess the credibility of sustainability commitments, analyse ESG risks, identify future leaders and spot companies showing the most progress.

    Covalence’s approach has always relied on a diversity of sources of information, combining web monitoring and artificial intelligence with human analysis. “We compare ESG data publicly reported by companies (disclosure) to online narrative content reflecting the perceptions of stakeholders such as the media and NGOs (reputation),” states the company’s website.

    The greenwashing risk indicator is no exception. It is calculated using news-based data, comparing forward-looking and backwards-looking news sentiment. Forward-looking news data covers companies’ sustainability commitments and aspirational statements, while backwards-looking data reflects how stakeholders perceive their achievements, legacies, and past controversies.

    “Our actual and potential customers – mostly investment professionals – are increasingly calling for forward-looking ESG data,” explain the authors of the whitepaper. “By comparing forward-looking and backwards-looking data, discrepancies and incoherencies between companies’ commitments and realisations can be identified and integrated into the risk assessment,” they add.

    Alarmingly, according to the findings of the Covalence green indicator, nearly 1,200 companies out of the more than 13,000 monitored (9%) present a risk of greenwashing on at least one of the three pillars, Environment, Social, and Governance, as of 30 April 2022.

    The whitepaper is studded with plenty of case studies, clearly illustrating how the greenwashing risk indicator works. Consider, for instance, Ericsson. Since 2020, the company has communicated various initiatives and commitments regarding their sustainability strategy: youth access to digital learning, partnership with UNICEF to map schools’ internet access, and green digital initiatives leading to a high forward-looking reputation score. Ericsson’s backwards-looking sentiment, meanwhile, has been on the decline since 2016 due to alleged corruption cases in China, Vietnam, Djibouti and other countries. This widened gap between forward-looking and backwards-looking sentiments indicates high greenwashing risk, according to Covalence.

    Looking at the aggregate numbers, perhaps not surprisingly, the most frequent occurrences of greenwashing risk are found within the energy and materials industry groups. Meanwhile, most exposed to green muting risks are insurance, diversified financials, pharmaceuticals, biotechnology & life sciences. The picture is slightly different in the social and Governance dimensions.

    Regarding geographies, it turns out that companies based in Australia show the most occurrences of greenwashing risk in the Environment dimension. China, however, leads the pack when considering the share of months flagged with green muting risks. Italy and Switzerland top the ignoble lists on the Social dimension of greenwashing. Australia and Switzerland are also in the lead when it comes to Governance.

    The paper also attempts to answer another critical question: Do companies with a high risk of greenwashing perform better or worse than those with a low risk? The answer, as so often when it comes to sustainability, is directly connected to an investor’s timeframe. “Greenwashing is penalised by long-term markets,” states the report. “Over short periods, however, companies at risk of greenwashing do better than others.” The sad truth seems to be that companies that spend more on communication than on concrete actions for sustainability make short-term gains that the markets appreciate.

    Let’s hope that, aided by AI, investors will eventually grow wiser and stop rewarding greenwashers, even in the short term.

    Image courtesy of Gerd Altmann from Pixabay
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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