“Green is good” has been the mantra of big business for some time now. However, companies’ love affair with the idea is currently being tested. It will take a renewed focus on hard data and quantifiable metrics to get things back on track.
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After a long phase of courting around all things sustainability and environment, social and governance (ESG), during which companies worked hard to refine their sustainability credentials and present the better versions of themselves in sustainability reports, advertisements and press releases, investors, customers and now regulators have stepped in and started to question the veracity of some of these claims. In response, many companies have simply stopped talking about sustainability.
The ESG backlash is getting real
According to analysis, the number of mentions of the words “environment, social and governance”, “ESG”, “diversity, equity and inclusion”, “DEI” or “sustainable development” during earnings calls of companies listed in the United States, has decreased by 31% in April-June 2023 compared to the same period a year earlier. Likewise, asset managers are increasingly removing the word “sustainable” from their fund names. In the first half of 2023, 44 sustainable funds have withdrawn the label of their brand names. This stands in stark contrast to 2022, when 99 funds added the word “sustainable” to their titles.
At the center of this rise in green silence is the threat of investor backlash and increasing government scrutiny over the accuracy of green claims, making even uttering the word sustainability risky these days. In fact, a dozen of the largest asset managers, private equity firms and listed brokers anti-ESG efforts as a risk in their annual reports this year.
One can’t help but imagine the leaders of the world’s biggest companies deciding that discretion is the better part of bravery and retreating below the parapet. However, this is not a particularly thoughtful business strategy and, in light of the growing wave of global regulations and legal actions focused on corporate sustainability reporting and greenwashing, it is not a viable long-term solution.
Corporate sustainability mandates feature prominently
Governments around the world have already begun to impose rigorous sustainability reporting requirements for large companies, while also establishing stricter standards to combat greenwashing activities. Soon, companies will have little choice over whether or not to publicly share their sustainability initiatives, and there is no doubt that these disclosures will be closely scrutinized. Initiatives such as the Corporate Sustainability Reporting Directive (CSRD) and associated European Sustainability Reporting Standards (ESRS) in Europe, as well as the new reporting standards introduced by the International Financial Reporting Standards (IFRS) ) and its International Sustainability Standards Board (ISSB), will increasingly dictate the specific information related to sustainable development that companies will have to provide. It is important to note that this information will ultimately need to meet the same rigorous criteria as information provided in financial disclosures.
Additionally, several jurisdictions have introduced measures to eradicate greenwashing by strengthening existing law, proposing new laws and developing other quasi-legal instruments that can be enforced by courts or regulators. These include two separate (but related) proposals from the European Union (EU): the Consumer Empowerment Directive for the Green Transition, which would prohibit companies from using broad environmental claims such as “eco-friendly” and “natural” unless they can provide detailed information. scientific evidence to support them, and the Green Claims Directive, which would set minimum standards for companies operating in the EU to assess their own environmental claims and clarify whether or not their products meet the claims they have made. Proposed sanctions for non-compliance with these standards include fines of up to 4% of the company’s annual turnover in countries where the violation occurs. And confiscation of all income from transactions related to counterfeit products.
In the United States, the Federal Trade Commission (FTC) is reviewing its Green guides, which set the standards by which companies can make environmental claims in their product marketing activities. Although they are not technically laws, the FTC has the power to sue companies for claims inconsistent with the Green Guides, so they have the same effect. At the same time, the United States Securities and Exchange Commission (SEC) is also actively working to enforce greenwashing standards through its Enforcement Working Group Focused on Climate and ESG Issuesand recently found $19 million from an asset manager for making misleading statements regarding its ESG investment process.
In Asia, Korea is set to become the first Asian country to pass a law specifically aimed at combating greenwashing. Under the draft amendment to the Environmental Technology and Industry Support Act, the Korean Ministry of Environment will be able to fine companies 3 million won, or about US$2,200, for infringing misleading the public about their environmental impacts and their ecological credentials. Commenters expect this fine to increase in the future.
In the United Kingdom, the Competition and Markets Authority (CMA) studies how companies market certain products and services as “eco-friendly” or make environmental claims that could potentially mislead consumers. They focus on whether such claims are supported by evidence and, interestingly, whether consumers are being misled by a absence information on the environmental impact of products and services.
Turn to data
This creates a difficult scenario for businesses. Say nothing about sustainability and you’ll run into a series of problems. If you say too much, you’ll find yourself facing another set of problems. Fortunately, there is a solution that has the power to meet disclosure requirements, meet the burden of proof when it comes to regulating greenwashing claims, and silence critics who say companies are spending too much time durability. It’s the data. It’s still the data.
By focusing on the structural and elemental aspects of sustainability risk, measuring and reporting this data in a clear, concise and standardized manner and establishing clear links between these individual measures and their impacts on company balance sheets, companies can transcend politics and potential accusations by focusing on quantifiable metrics. Simply put: Companies should treat sustainability reporting like financial reporting. Start thinking of CSRD, ESRS, and ISSB like Sarbanes-Oxley, Dodd-Frank, and MiFID instead of some new kind of reform we’ve never seen before.
Just as we have seen in financial regulation and reporting, the long road to more sustainable business practices will have some rough patches along the way, but data will not only liberate businesses, it can also enable you to gain a competitive advantage when they are used. correctly.