Klemen Kreča, associate at Schönherr Attorneys at Law and Business Student at KU Leuven, is the co-author of ESG Colourwashing: Combating Modern-Day Corporate Hypocrisy, together with his former professor Timo Spitzer, internationally acclaimed Head of Legal. The essay was edited by Cambridge University Press and Assessment, and published just a month ago on International In-House Counsel Journal.

By “colourwashing” the authors understand those practises of companies that create an illusion of ESG compliance and long-term sustainability, while in reality don’t. Furthermore, they refer “whitewashing” as deliberately concealing potentially incriminating facts by corporate actors, “bluewashing” as using rather empty terms when introducing ethical and social initiatives, “brownwashing” as apparently supporting Black, Brown, Indigenous, etc. while not implementing antiracist policies, “pinkwashing” as the same for female empowerment, and “rainbowwashing” when it comes to LGBTQ+, for instance only around Pride month or only in the form of rainbow logo.

Now Klemen Kreča himself will explain further issues related to his article as well as questions that might arise from it.

Mariana González: Why would some companies fake an appearance of ESG compliance and what is the moral hazard here?

Klemen Kreča: ESG can have net-positive effects for a given company, i.e. it may make economic sense to implement ESG metrics (a net higher income at the end of the day). This can be due to direct benefits of ESG criteria (better efficiency) or indirect market appreciation (ESG-orientated consumers/investors start favouring your company more). However, this is not always the case, especially not in all industries. There are companies where ESG criteria brings almost zero direct benefits and is basically just an expense, bringing down the bottom line. These companies won't be inclined to invest into ESG, although they might be inclined to say they do in order to reap the aforementioned indirect benefits - i.e. the moral hazard. 

MG: From your point of view, what is being done wrong at the national and supranational levels, that is not working enough to prevent companies from colourwashing ESG? (disclosure obligations?)

KK: The biggest issue in the EU currently is a lack of harmonization. There are a lot of different tools one could utilize to combat this, but most of them are hindered by a lack of cooperation between Member States or an absence of competence on the side of the European Commission. Moreover, in most cases the values concerned (of the products) are quite miniscule in comparison to the costs of private enforcement by the consumers/customers - this is then left to (supra)national public bodies which due to the aforementioned lack of harmonisation and inefficiencies are in most cases far too slow to react. On the side of the investors, Europe would be advised to consider establishing a EU-wide possibility of private enforcement if ESG misrepresentations are made by a listed company. 

MG: Therefore, what else needs to be done to strengthen current regulatory systems?

KK: See the above answer. In short, harmonisation (or unification and giving clear competence and resources to the European Commission) and possibility of private enforcement for the investors. 

MG: Concerning the role of CEOs and legal departments, what can you tell us about their relevance on the prevention of coulourwashing?

KK: It is truly paramount, even if we had a perfect enforcement system to combat colourwashing, companies could still find new ways of bypassing such legislation (and they do - currently there is an enormous amount of legislative measures which, inter alia, look to address this issue with little to no avail) - its up to the companies themselves to comply even when no one is watching. This is a slightly utopian idea - the carrot if you will. The stick? Fines/Damages.