How to Avoid Greenwashing in Agricultural Finance

As consumers and investors increasingly put their money behind sustainable business practices, there is an increasing risk of overpromising and underdelivering when it comes to ESG (Environmental, Social, and Governance) initiatives. Greenwashing can harm a company’s reputation as well as hinder the transition to a less-risky, more water and climate-resilient future.

The World Economic Forum argues that “greenwashing could slow our progress towards meeting climate and social goals.” Lenders and investors should conduct proper due diligence in their efforts to avoid greenwashing in agricultural finance.

ESG commitments should be put in place for a reason; the climate, water, social, and governance issues of today create opportunities for businesses to not only elevate their positive impact but also improve the risk profile of their own business – strengthen their business.

Many times the term, “greenwashing,” can bear a sting when it hits the ear. Ag professionals ought not resent it. Rather, they should look at greenwashing prevention as the great opportunity that it is: a reason to use their creativity, ingenuity, and resources to improve their businesses, create reputation and wealth, and prevent risk-bearing situations.

This post is directed at how to avoid greenwashing in agricultural finance, as well as how data-driven intelligence can lead to more effective, verifiable results. It will give insight into three steps to avoid the risks of greenwashing:

1. Use Good Tools
2. Produce Verifiable Results
3. Get the Message Right

What is Greenwashing in Agricultural Finance?

A report by Business for Social Responsibility (BSR) describes greenwashing as “disinformation disseminated by an organization … to present an environmentally responsible public image.” It can come in many different forms, including “selective disclosure,” such as publicizing eco-friendly practices while leaving out others, and “symbolic actions,” such as donating to an NGO without addressing the underlying problem. Sometimes, greenwashing can come from a lack of accurate data and measurement capabilities.

ESG Goals and Water Risk

In agriculture, many ESG goals are closely linked to water risk, so this should be an area of focus when it comes to reviewing a company’s sustainability plan. Agriculture uses up to 90% of all water consumed in the American West, so it makes sense that this would be a key factor in ESG measurements and discussions.

Water covers all three metrics in ESG. Drought and flood risk heighten the likelihood of water risk, bringing in a complicated web of issues that damage financial integrity. Farmers, communities, Tribes, and other stakeholders give water in the West a highly social ethos. Violating the Sustainable Groundwater Management Act (SGMA) (as one example of regulation) is a clear Governance risk, and can make or break the sustainability of an ag operation.

Social Impacts of Water Risk

Water risk is also a factor when it comes to Social ESG goals because water shortages often hit Tribes, People of Color, and disadvantaged communities hardest. In the recent California drought (2012-2016), a study found that “the communities most impacted by drinking water challenges during the last drought were small and rural … [with] high proportions of both lower‑income and Latino residents.”

In the Colorado River Basin, Grist reports that “tribes in the basin only have access to a tiny fraction of the river’s water” and that “in order to turn paper rights into permanent wet water rights, tribes have to enter into a complicated legal process called a water settlement with the federal government, states, water districts, and private users.”

In other words, water management practices can have an effect on the entire region, from communities that depend on sustainable drinking water sources, to the streams, aquifers, and ecosystem services that contribute to a healthy agricultural system for all stakeholders, including growers and ag finance businesses.

Risks of Greenwashing in Agriculture

Regardless of intentions, greenwashing in ag finance can create a number of risks for lenders and investors, from reputational to regulatory. Many of these risks fall into the category of transitional risks — or risks that arise as part of the industry’s response to climate change, water issues, and the transition to more sustainable practices.

BlackRock has argued that “greenwashing is a risk to investors and detrimental to the asset management industry’s credibility,” while outdoor clothing brand Patagonia explains that “holding companies accountable for their statements is the right thing to do.” Recently, the SEC issued an alert warning that “some investment advisers are promoting funds as ESG products when the reality is quite different.”

Reputational risk, combined with regulatory pressure, makes it especially important for ag finance institutions to take a close look at ESG claims. Reporting requirements are only going to get more complex in the years ahead, so it’s best to get ahead of any issues and avoid investing in companies that can’t back up their claims.

It’s also worth keeping in mind that while current ESG conversations are weighted heavily toward carbon emissions, this focus distribution is likely to become more balanced with water in the next few decades as the pattern of wet and dry spells become more unpredictable, and the risk of drought and flooding increases. In order to avoid greenwashing in agricultural finance, ag professionals must put water security at the front and center of their ESG initiatives.

How to Avoid Greenwashing – Match the Promise with a Clear, Measurable Plan

The best way to avoid greenwashing in agriculture is to ensure that any promises are backed by a clear plan of action. While ambitious ESG targets have their place, they must be driven by accurate data and verifiable results in order to be productive and carry weight. Here are three steps ag professionals can take to avoid greenwashing:

1. Use Good Tools

First, ag professionals must use appropriate tools to plan and execute ESG initiatives and to adhere to reporting requirements and financial disclosure regulations. In agriculture finance, GIS tools are especially suited for ESG data collection, because users can gather the information they need on a parcel-by-parcel basis, and use portfolio-centric, data-driven intelligence to inform their ESG commitments.

2. Produce Verifiable Results

Next, ag professionals must focus on ESG goals that produce verifiable results. Claims that can’t be verified can damage a company’s credibility and make it harder to comply with standardized reporting requirements down the line. By using GIS tools to collect data during the valuation and quantification process, ag professionals can be prepared for closer scrutiny by the general public, the media, or regulatory bodies.

3. Get the Message Right

Companies that carry out successful ESG initiatives and have the data to prove it will be well-placed to stay competitive in a changing environment. Sustainability is no longer a niche issue; it has gone mainstream among investors and consumers alike.

In agriculture finance, sustainability and ESG can be good things – they present opportunities.

With the right marketing and follow-up reporting, organizations can present themselves as leaders in the sustainability space and contribute to a more resilient economy.

The Bottom Line

Greenwashing refers to exaggerated or untrue sustainability claims that can’t be backed up by evidence. Not only can greenwashing damage a company’s reputation, but it can also lead to regulatory risk as governments roll out stricter ESG reporting requirements. Lenders and investors must learn how to avoid greenwashing in agricultural finance in order to meet their responsibilities and protect their bottom line.

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