The term greenwashing – providing deceptive information apt to mislead stakeholders about how ‘green’ a company is – was coined in the 1980s but has become increasingly topical, as investors, consumers and other stakeholders demand more transparency and accuracy of environmental, social and governance information.
While some corporates authentically value and consider ESG issues, others have missed the mark and are being challenged to go beyond ticking the box.
The growing concern over greenwashing has pressured governments and regulators to define and enforce clear standards. Recent developments in the US and UK are building momentum towards such standards.
The drive to global standardisation
At the UK-hosted G7 summit in June, members secured an agreement to mandate climate disclosures across member economies by 2025. The G7 agreement has the objective of globally standardising the approach to ESG compliance to minimise greenwashing.
Under the G7 agreement, climate-related disclosures should align with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) in 2017 that created an initial framework for companies to improve their ESG culture, and give stakeholders a clearer view for assessing ESG compliance.
However, the recommendations drew criticism because they were not mandatory and arguably lack sufficient detail. ESG enthusiasts hope that the G7 agreement will address such concerns.
The G7 agreement follows other recent ESG initiatives actioned by governments across the globe, such as measures by the US Securities and Exchange Commission and UK government agencies to place increased emphasis on ESG reporting.
The SEC takes a tougher stance
In March, the SEC’s Enforcement Division announced its Climate and ESG Task Force, solidifying a division-wide effort to proactively identify ESG-related misconduct, as public investors become increasingly more reliant on corporate disclosures when making financial decisions.
The task force will look for “gaps or mis-statements in issuers’ disclosure of climate risks under existing rules” and analyse “disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies”. This search for misconduct is poised to involve heavy data mining and analysis to assess information across issuers and whistleblower tips to identify potential violations.
The task force follows the SEC’s other recent ESG-related actions, including the appointment of a senior policy advisor for climate and ESG, and the Division of Corporate Finance announcing its priority to ensure issuers’ compliance with existing disclosure rules and to update its 2010 guidance on climate-related disclosures.
The existing SEC Commission Guidance Regarding Disclosure Related to Climate Change sets an expectation that issuers consider climate change risks within corporate disclosures and provides example climate change issues and the impact to consider, such as possible manufacturing disruption caused by extreme weather.
Modernising the guidance moves us closer to a framework for consistent, comparable and reliable ESG-related disclosures. This may come sooner rather than later with the US House of Representatives passing the ESG Disclosure Simplification Act to mandate standardised ESG disclosures among SEC issuers and form a new advisory committee to the SEC.
Eyes remain on the US as the legislation moves to the Senate.