Canadian companies are using social media to boost their ESG credibility, but investors aren’t buying it

Tesla founder Elon Musk made his stance on environmental, social and governance (ESG) ratings unmistakably clear in June 2023 when he posted “ESG is the devil” on his social media platform, X. Musk, a well-known critic of ESG, made the comment in response to a report that cited poor ESG scores for his electric vehicle company, Tesla—ironic, considering the environmental benefits of Tesla’s products.

However, research has shown that strong ESG performance reduces companies’ cost of capital, often resulting in cheaper credit and better stock performance. Investors are becoming more environmentally and socially aware of the impact of their investment decisions and are subsequently gravitating to companies that reflect those values.

In addition, investment strategies based on news sentiments on social media are gaining traction, with social media becoming an important source of information for investors, particularly younger ones.

We know that social media can move markets. Musk’s own posts, for instance, have been associated with significant price fluctuations in cryptocurrencies like Dogecoin and stocks such as Tesla. Similarly, co-ordinated actions by social media users propelled GameStop’s price upwards by around 80 times in early 2021.

Unsuprisingly, even as Musk derided ESG ratings, our research has found that many companies have increasingly turned to social media channels—including X—to burnish their ESG credentials.

Rising ESG engagement on social media

Our recent research examined how companies’ ESG disclosures on social media impacted their financial performance, specifically their cost of equity.

We analyzed posts on Twitter (now X) between 2015 and 2022 by the Canadian firms that were in the S&P/TSX Composite Index as of June 15, 2022. Of the 239 firms included in the index, 185 were found to have a Twitter account.

During our sample period, the number of firms using the social media platform grew. In 2008, less than 10 percent of these firms used Twitter, but this percentage had increased to nearly 80 percent by 2022.

As more companies turned to social media, engagement on ESG-related issues by firms also grew. While just under 2% of total tweets by these firms were ESG-related in 2016, by 2022 that number exceeded eight percent.

Interestingly, the companies that were most actively posting about their ESG commitments also tended to be the heaviest greenhouse gas (GHG) emitters.

For instance, those in the energy, industrials, materials and utilities sectors represented the most significant proportion of environmental tweets. These same companies accounted for over 95 percent of industrial GHG emissions of the companies studied. This is unsurprising, given these firms are under higher scrutiny when it comes to environmental performance.

But was all the effort by these firms to promote their ESG image on social media resonating with investors? According to our research, the answer is no.

Corporate greenwashing

Our research uncovered a disconnect between corporate environmental messaging on social media and meaningful action taken by these companies.

When we looked at whether companies were taking meaningful actions regarding their environmental record by tracking GHG emissions reductions, we found no significant association between firms’ environmental messaging on social media and reductions in GHG emissions.

For many firms, their ESG-related posts seemed to be more about image management than signaling a real commitment on environmental issues.

This could signal that firms are engaging in greenwashing behavior—a practice where companies project an eco-friendly image without actually making substantial efforts to improve their environmental impact.

Words must be backed by action

Additionally, our research suggests that ESG-related social media activity has limited impact on financial outcomes. We found that companies that posted about ESG matters were not reaping the financial rewards often associated with strong ESG performance. These firms did not see a lower cost of capital, cheaper credit or better stock performance.

Our research also found that investors are becoming increasingly skeptical of corporate messaging that lacks substantive backing. While many investors see social media as a relevant information channel, some have been tuning out corporate ESG social media communications as mere noise, given the observed selectivity of disclosures and lack of follow-through.

ESG has had some bad press recently, but it’s not “the devil”—it’s merely a business strategy. However, our research shows that it can be “devilishly tricky” to convince investors about genuine ESG performance through social media alone.

It turns out that words are not enough to impact capital providers if they are not supported by actions.

Our research serves as a cautionary tale for firms relying on social media to bolster their ESG image. Without backing up their claims, companies risk losing credibility in an environment where authenticity and accountability are paramount.

This article is republished from The Conversation under a Creative Commons license. Read the original article.