What Are the Risks of Social Washing?
Investors should push for greater disclosure about the management of social issues.
When companies released social media statements about female empowerment for International Women’s Day this year, a Twitter account called the “Gender Pay Gap Bot” was ready to call out the ones that weren’t walking the walk.
For each tweet celebrating the achievements and value of a company’s female employees, the bot responded with a return tweet detailing the respective firm’s publicly available gender pay gap data.
While amusing, this series of events put a spotlight on the issue of “social washing”—a practice in which companies make misleading, exaggerated, or unsubstantiated claims about the management of social risk or social issues.
Because there is limited data on this type of risk management, social washing is likely a widespread practice that often goes unchecked. Investors must push for greater disclosure to assess whether social risks are being effectively managed.
Social washing, like the better-known greenwashing, occurs when there is a disconnect between perceived commitments to issues and genuine action.
The practice can come in the form of brand activism or corporate statements about a wide range of social issues including diversity, equity and inclusion; labor standards; racial justice; human rights; product safety; and data privacy.
Making these statements without taking concrete action may mask poor management of social risks, which could create valuation risk for companies or mislead impact-oriented investors who prioritize management of social issues in their investment decisions.
What’s behind the rise in social washing? Simply, internal and external stakeholders are placing increasing importance on the management of social issues, and companies are being forced to address shortfalls—or at least pay lip service to causes.
This pressure is illustrated by:
While it is difficult to pinpoint the catalyst for heightened awareness, we expect the culmination of several events in recent years has brought social risk into sharper focus: for instance, the coronavirus pandemic, the Black Lives Matter movement, and a degradation of reproductive rights in the United States.
Brand activism is a high-profile form of social washing commonly deployed by consumer-facing companies, and there are a great many examples of the practice backfiring when consumers uncover companies’ thinly veiled attempts to profit from social causes.
As noted by the Guardian, these include:
At the same time, companies are also increasingly expected to react and take a stand on high-profile social issues while juggling conflicting interests of stakeholders. Inevitably, this means alienating certain groups while appeasing others.
A recent example of this is companies like Citigroup and Lyft publicizing support for employees seeking abortion healthcare in a post-Roe v. Wade world. These stances appeased pro-abortion-rights employees, but led to anti-abortion-rights activists and conservative lawmakers retorting with legal threats.
Even when companies heed to social pressure and act, there can be negative financial consequences, as seen with major apparel companies like H&M, Nike, and Adidas. These companies suffered falling sales in China as consumers boycotted Western brands after these companies altered their sourcing strategy to avoid Xinxiang on concerns regarding forced labor among the Uyghur population.
However, remaining silent on social issues is also a risky strategy. This was illustrated by Disney’s decision to initially not denounce Florida’s Parental Rights in Education bill, more commonly known as the “Don’t Say Gay” bill, which aimed to limit discussions of sexual orientation and gender identity in schools. Disney employees expressed outrage, as did members of the LGBTQ+ community, with whom Disney has built a profitable relationship. Disney quickly reversed its stance and pledged a $5 million donation to organizations supporting LGBTQ+ rights, signed the Human Rights Campaign statement opposing such legislative efforts in other U.S. states, and paused political donation in Florida, irritating Republican supporters. This was after it was revealed that the company previously donated to politicians who had sponsored the bill.
While it is too soon to determine whether this mixed messaging will have a negative financial impact on Disney, including through higher employee turnover, the magnitude of the pledged donation is largely tokenistic relative to the company’s fiscal 2021 net income of nearly $2 billion.
Nonetheless, poorly crafted communication can lead to backlash from both sides of a debate, as seen with Coca-Cola, which initially withheld from taking a public stance on the state of Georgia’s voting laws, but later denounced the legislation after it passed, resulting in rotating boycotts and reputational damage.
Finally, social washing is most routinely observed in vague, lofty corporate statements included in company fillings like annual or corporate social responsibility reports or, as mentioned above, via social media.
Social washing practices may result in social risks being poorly managed or even elevated.
Brand activism blunders or backlash from a company taking a stand have proved to be immaterial to a company’s valuation in isolation.
However, poorly managed social risks masked by unsubstantiated claims are likely more meaningful. For instance, if companies deflect attention from weak labor relations or a lack of adequate DEI practices with exaggerated claims and no action, they risk rising operational costs, falling productivity, and higher turnover.
In the future, we also expect companies involved in social washing could be exposed to regulatory fines by consumer advocacy bodies cracking down on false or misleading advertising, as has recently occurred with greenwashing for consumer goods.
Nevertheless, a more immediate concern is that when corporate commitments prove unsubstantiated, companies risk reputational damage and difficulty attracting and retaining both customers and employees.
For example, as noted by the Harvard Business review, employees are growing increasingly disillusioned and outraged at the disconnect between calls for racial justice with no substantial action to support the cause and are empowered to highlight the hypocrisy.
Social media also elevates this risk, since opinions—good or bad—are amplified across the internet, and companies making shallow or unsubstantiated claims risk being exposed in a public arena.
Take Starbucks, which has a reputation as a socially progressive employer with generous employee benefits and support for liberal leaning social causes. But it has also been linked to union-busting activities—and employees took to social media to call out the company for this conflict.
To uncover social washing and assess whether social risks are being appropriately managed, investors must push for greater data disclosure.
However, unlike environmental risk, which has a well-established framework and comparable metrics like carbon emissions, measuring social risk is a still- evolving field.
Data related to social risks (particularly diversity data, which can include employees’ race or ethnicity, gender identity, sexuality, and disability status) is typically gathered through self-identification and voluntary disclosure, and collection is outlawed in certain regions under privacy legislation. As a result, the data available is often measured and reported inconsistently, is often qualitative and localized, and is difficult to compare among organizations.
There’s currently a patchwork of legislation and disclosure rules that guide behavior and regulate policies, recordkeeping, reporting, and board representation. These include the mandatory gender pay gap disclosure by British companies with more than 250 employees, certain Canadian companies having to disclose diversity policies and practices for the board and senior management, and the Nasdaq Stock Exchange requiring listed companies to disclose board diversity data.
We’re hopeful that there will be more regulatory progress to standardize such data in the future. But in the absence of a comprehensive dataset, there are a few things investors can do to assess companies’ commitments:
Assuming data disclosure improves with regulatory and market pressure, the next frontier is to understand how to analyze social risk data itself.
We expect with greater visibility, investors will be able to more concretely tie social risk to valuation impact. They’ll also be able to use frameworks like the United Nations Sustainable Development Goals to develop thresholds for appropriate social risk management.
Emma Williams does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.