ESG, family businesses most at risk in sustainability reports to market

Family businesses are more at risk of Esg-washing in sustainability reports because they tend to use a more positive tone than the actual content; there is a greater propensity for Esg reporting that is more detached from reality, is explained in the summary of the paper presented yesterday in Paris during the Esma Research Conference. The study, titled "Smoke and Mirrors in Esg Reporting: Does Ownership Matter?", was conducted by Marina Brogi, Professor of Economics of Financial Intermediaries at the Bicocca University of Milan, and Valentina Lagasio, Associate Professor at the Sapienza University of Rome. 1,622 US, European and Asian listed companies operating in different sectors were analysed.

There are three new features in the paper. The first is the introduction of the new concept of Esg-washing, which is broader than greenwashing because it also embraces social and governance aspects. The second new element is the Esg Severity index (Esgsi). "The Esgsi," the paper's summary explains, "detects inconsistencies between the positive tone of the Esg narratives and the actual density of substantive Esg content.

Thanks also to the use of artificial intelligence, the indicator highlights the discrepancy between Esg word and content. "These analyses reveal that vague and emotionally positive language often replaces measurable Esg commitments," the paper explains. "This raises concerns about information asymmetries in the Esg data market and the potential risk of misleading investors, especially in the fund industry.

The third and most important innovation is the identification of the type of companies, family-controlled companies, that most often incur the somewhat inflated ESG narrative. This is not because such companies are less sustainable, but because reputation weighs heavily on them and this can push them to tell more than they do.

The antidote? The presence of institutional investors, a more widespread shareholder base and greater size help make communication stick to the facts. 'It is possible that the optimistic narrative,' explains Professor Brogi, 'especially in the case of family businesses, represents a kind of Esg-wishing dictated by the desire to be compliant with regulations, rather than outright Esg-washing. From this point of view, it is important that even in the area of EGMs, companies can focus their efforts and thus also their consequent disclosure starting from the actions that are really priorities in their specific sustainability path'.