Are agencies complicit in the great ESG cover up?

The advertising agency sector, valued at $822 billion, is highly fragmented.

Yet, the campaigns for top brands are primarily handled by agencies belonging to six global Holding Companies: Dentsu, Havas, IPG, Omnicom, Publicis, and WPP.

Despite these agencies often touting their environmental awareness, Planet Tracker’s analysis revealed continued widespread support for clients with damaging environmental footprints, particularly in the oil and gas, and automotive industries.

These major Advertising Holding Companies appear to lack concrete ESG commitments related to their clients. Their approach seems to be more about changing client attitudes from within rather than refusing to work for environmentally harmful clients.

Many agencies rely on industry initiatives, such as Ad Net Zero, to present an environmentally-concerned face to the world. However, this only applies to the internal environmental footprint of the companies, not the external footprint supported, such as the continued support of big oil.

The Impact of Advertising on Environmental Footprints

The report argues that what matters, and what investors should be aware of, is not just the internal footprint created, but also the external footprint supported.

This Scope 3 type of assessment mirrors the extended supply chain evaluations industrial firms are required to conduct. The analysis raises concerns about Advertising Holding companies potentially being included in ESG funds due to positive ESG scores.

There is a worry that investors might be looking the wrong way, and the hope is that additional screens and a thorough review of underlying dynamics prevent this from happening.

Clearer measurement and reporting by agencies regarding their clients’ environmental footprint scores are crucial to enable investors to make more informed decisions. This is not just a ‘nice to have’ option.

Most large businesses already require their agencies to be a signatory to the United Nations-backed Race to Zero campaign.

However, two of the large Holding Companies, IPG and Omnicom, are not members and there is no obligation to comply with the guidance on Advertised Emissions or Client Disclosure Reports, although that is currently under review.

The Need for Transparency and Accountability

The concept of Advertised Emissions is an effective approach for advertising and public relations firms. Advertisers and agencies should choose not to advertise certain products in the same way that financial institutions can choose not to invest in certain industries.

The Client Disclosure Reports require PR & Advertising agencies to disclose their revenue by client industry. The purpose of these disclosures is to build transparency in true Scope 3 for an industry whose product is mainly intangible.

There’s a real risk for agencies here as the Race to Zero campaign is currently reviewing the guidance and is likely to increase requirements.

If these two initiatives move from guidance and into criteria, then most agencies will be non-compliant with Race to Zero and will risk their inclusion in pitches for new clients.

Investors, who own an average of 43% of the five listed advertising Holding Companies, are cautioned against viewing environmental footprints solely as non-financial issues. Client losses impact the revenue line, and staff disillusioned with the environmental footprint of agencies can significantly affect employee costs which average 63% of total costs.

Intangible assets, averaging 40% of Holding Companies’ asset base, are crucial and may directly influence liabilities and debt coverage. Reputational issues impacting goodwill valuations could lead to write-offs, directly impacting net income and lowering assets backing lending.

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