How US and UK regulators are targeting greenwashing

A green taxonomy in the UK

Emphasis on ESG is growing in the UK too. In June, the UK government appointed a Green Technical Advisory Group (GTAG) to advise the government in establishing a green taxonomy to stamp out greenwashing. The taxonomy aims to answer the question 'what does green mean?' with clear, data-driven criteria to better inform investors, businesses and consumers in their ESG-related decisions.

ESG enthusiasts should pay close attention to the output of the GTAG, which first met in June and will provide initial recommendations to the UK government in September.

Establishing the GTAG is one step in a series taken by the UK government in recent years post-Brexit to launch its own ESG framework. In November 2020, a cross-Whitehall and regulator task force published an interim report and roadmap that outlines a strategy towards “mandatory TCFD-aligned disclosures across the UK by 2025” – a target adopted by G7 members.

In December 2020, the Financial Conduct Authority introduced an ESG disclosure rule for commercial companies with a UK premium listing and, as of June 2021, proposes to extend the rule to include issuers of standard equity shares and others such as asset managers, insurers and pension providers.

The ESG disclosure rule states that in-scope firms must now disclose, on a comply-or-explain basis, aligned with the TCFA’s recommendations and must consider ESG-related risks and opportunities in their disclosures. This rule will overlap and interact with the EU’s Sustainable Finance Disclosure Regulation.

The FCA indicated that compliance basis for this rule may become more robust, requiring more detailed expectations – particularly regarding quantitative disclosures (for example, metrics, targets and scenarios) – to supplement the existing principles-based approach.

It is evident that ESG-related regulatory action and enforcement in the UK is far from its full potential in identifying cases of greenwashing that ultimately lead to enforcement action. The FCA is one to watch, particularly as it gathers public feedback on the proposals to make its disclosure rule more broadly applicable.

Not for the first time, the US has moved ahead to root out misconduct in ESG metrics reporting with a view to enforcement, possibly accompanied by new legislative mandates, while the UK and the EU spend time defining the problem.

However, because of the scale of the issue, it will not be long before stricter regulation becomes a global trend. Whatever the regulators do, there is a bigger problem to keep the C-suite up at night: consumers, investors and wider stakeholders stand ready to take action on climate-related issues that could bring even the biggest companies to their knees should they stray from their sustainability commitments. The public’s demand and political pressure for enforcement in this area will only grow. 

To avoid regulatory and legal actions, capital flight or stakeholder backlash, companies must rise to the challenge of producing comprehensive ESG data and aligning disclosures with required standards in their jurisdictions. Systems and controls for reporting financial data are second nature in most companies, and modern accounting principles have been established over many decades.