Family businesses are more at risk of ESG laundering in sustainability reports because they tend to use a more positive tone than the actual content; there is a greater tendency towards ESG communications being more detached from reality, this is explained in a summary of papers presented yesterday in Paris at the Esma Research Conference. The research entitled “Smoke and Mirrors in ESG Reporting: Does Ownership Matter?“, created by Marina Brogi, full professor of Economics of financial intermediaries at Bicocca University of Milan, and by Valentina Lagasio, professor at Sapienza University of Rome. 1,622 listed companies in the US, Europe and Asia, operating in various sectors, were analyzed.
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Three new features of this paper. The first is the introduction of a new concept of ESG-washing which is broader than greenwashing because it also includes social and governance aspects. The second new element is ESG Severity index (Esgsi). «Esgsi – explained in the paper summary – detected an inconsistency between the positive tone of Esg’s narrative and the actual density of Esg’s substantial content».
Thanks to the use of artificial intelligence, this indicator highlights the differences between word content and Esg. «This analysis reveals that vague and emotionally positive language often substitutes for measurable ESG commitments – this is explained in the paper -. This raises concerns regarding information asymmetry in the ESG data market and the potential risk of misleading investors, especially in the funding industry.”
Family factors
The third innovation, the most important, is the identification of the type of company, namely the family-controlled company, that most often falls into the rather exaggerated ESG narrative. Not because these companies are less sustainable, but because their reputation weighs heavily on them and this can encourage them to say more than they do.
The antidote? The presence of institutional investors, a broader shareholder base, and larger size help keep communications in line with the facts. “It is possible that the optimistic narrative – explains Professor Brogi –, especially in the case of family businesses, represents a kind of ESG desire determined by the desire to comply with the law, rather than due to actual ESG laundering. From this point of view, it is important that even in the field of ESG, companies can focus their efforts and therefore also the disclosure of their consequences starting from actions that are truly prioritized in their specific sustainability path”.
