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As the popularity of impact investing continues to grow, companies are beginning to pay more attention to the sustainability of their operations and reporting on their environmental and social impacts in the interest of investors. While this has pushed many companies to strive for sustainability, others have resorted to simply misleading the public on the true nature of their operations in their reporting. In fact, some companies are already being called-out for this. The Saudi Arabian oil company, Aramco, ensured investors that drilling for their oil generated fewer global-warming emissions compared to other producers. When it came to what they were reporting, however, many of their refineries and petrochemical plants were excluded from the overall carbon emissions disclosures. Had they been included, Aramco’s self-reported carbon footprint would’ve nearly doubled in size. Due to these practices, it’s important investors know what data they should look out for to make sure the company they’re investing in is truly as sustainable as it claims.
According to the European Commission, 42% of companies are believed to be making ‘green claims’ that are ‘exaggerated, false, or deceptive.’ Many of these claims were found to either not provide “sufficient information for consumers to judge the claim’s accuracy” or the company “did not provide easily accessible evidence to support its claim” in more than half of the cases reported. While companies can and do get punished for making falsified claims, it’s often difficult to police due to the lack of formal terminology regarding sustainability. By paying attention to unclear or missing data, however, investors can avoid funding these companies altogether.
Vital pieces of missing data from a companies’ operations is often a red flag, such as Aramco not reporting on the emissions a majority of its facilities produced, as is data that is vague and purposely leaves out an explanation for its claims. Including “references to ‘natural products’ without adequate explanation or evidence of the claims” or H&M misleading customers by not providing adequate detail on why their garments cause less pollution than other garments.
There are also other ways outside of data for investors to watch out for misleading claims, specifically by paying attention to key trends and controversies in a company and the industry it’s a part of. Some industries are going to be more involved with certain key issues than others and should disclose as much information on that issue as possible. For example, a company in the food retail industry is more likely to report on the health and nutrition of their products than a company in the communications industry. Investors can further avoid these deceptive claims by paying attention to trends in the industry as much as the data reported by individual companies.