Financial organizations are increasingly leaning into ESG, driven by both new regulation and by customer demands for businesses that are responsible and contributing towards a better world. Those organizations are required to report on ESG progress, especially concerning environmental investments, decarbonizing supply chain and operations. At the same time, with few regulations in place to define what is and is not “sustainable”, many organizations, sometimes even unconsciously, engage in the process of greenwashing – where they create a report showing good sustainability numbers without having any actual results to back those numbers up.
When Does Reporting Become Greenwashing?
Today, organizations ranging from the European Banking Authority to the Financial Conduct Authority (UK), The European Council, and the Securities Exchange Commission (U.S.) are all working to create stricter standards above and beyond the Green Deal commitments. New regulation, including better-defined metrics and requirements could help financial organizations to avoid greenwashing.
At the same time, making those distinctions is often complex. That’s quite a bit driven by the fact that it’s difficult to determine what “sustainable” or “green” actually is, especially for multi-national organizations with investment portfolios spanning regional and sectoral differences. Further, determining the impact of a financial product in meeting sustainability goals can also be complex.
Greenwashing can also take many forms. For example, in the UK, the FCA pointed out multiple examples they highlighted as greenwashing, including a fund with an ESG-related name, but which tracked an index that was not ESG-focused, investment strategies citing ESG goals but without measurable non-financial objectives alongside financial objectives, and instances where a fund’s holdings do not easily align with the promises made to consumers. Other conversations show how organizations appear to be performing very well on a surface level, but if you look into the organization, their ratings are driven by controversies and claims. Examples of these organizations span from Philip Morris and Mondelez to Oil and Gas industry.
Often, for financial organizations, choosing to invest in an organization now means conducting due diligence as to whether that organization’s business activities are as sustainable as they claim – from their supply chain and materials resourcing to how they employ people. And their business model and product or service they offer plays the most crucial role.
Controversy with the EU Taxonomy
While most sustainability reporting requires aligning investment with the EU Taxonomy, the Taxonomy itself has recently come under fire for announcing that gas and nuclear energy align with taxonomy. That inclusion was rejected on the 14th of June 2022 but shows how even the organizations creating the guidelines aren’t always aligned.
Moving Forward to Truly Sustainable Reporting
Currently, organizations and government bodies around the world are working on creating regulation and better standards which could curb greenwashing and ensure that claims of meeting ESG values can be proven. That’s furthered by other initiatives, the IIRC’s guide to integrated reporting, and other standards will help financial organizations to move forward with clear and transparent reporting on financial and non-financial value creation. Upcoming changes to EU regulation, like the inclusion of Green Asset Ratio (GAR) and Banking Book Taxonomy Alignment Ratio (BTAR) will add new metrics to help organizations gauge sustainability reporting.
Next steps in regulation
- A proposed blacklist for non-ESG organizations
- The EC Circular economy action plan
- The EC substantiating claims initiative
- FCA Sustainability Disclosure Requirements (UK)
- New standards set by the International Sustainability Standards Board
- The adoption of the European Green Bond Standard to replace the 80+ environmental labels used, often without any third-party assessment, across the EU
- What can financial organizations do now?
Today, regulations are vague, reporting metrics more so, and an investigation into a green company could reveal that reporting is based on just part of the product, there’s nothing to back up generic claims, or sustainability metrics or labels are not backed by third-party data. At ACE, we see our clients find it challenging not only to meet reporting obligations but also to determine what good reports are. Financial organizations looking to meet ESG standards must establish due diligence to maintain the accuracy of their own reporting. The following activities might be a good start:
- Train employees to ensure they understand what constitutes good ESG disclosure. Resources like the FEPS foundation provide some educational material here, but mostly greenwashing is poorly defined and therefore organizations will have to put together their own research
- Implementing due diligence and assessments for assessing green credentials or claims made by organizations
- Implementing due diligence to ensure transparency in decisions made regarding ESG investments
- Requesting third-party assessments or proof of ESG claims
- Implementing monitoring to ensure that reported environmental data is up-to-date, objective, and accurate
- Set Science Based Target and have it validated by SBTi
- Report to public initiatives such as CDP and GRI, obtain certifications proving your activities are credible and on track
The demand for green financial products is growing and everyone wants to be onboard. At the same time, actual requirements for what is green and what just “looks” green can be hazy.
If you have questions about ESG reporting, establishing standards and metrics inside your organization, or want to have a talk about your organization’s reporting standards, drop by for a cup of coffee, ACE + Company is happy to help.Back to Greenwashing or Reporting on Measurable Change?