“Greenwashing 2.0” creates even more risk

The ambition and frequency of sustainability rhetoric on issues like Net Zero is growing. But, the lack of interim targets, transparent disclosures, and integration of sustainability goals into operating frameworks too often means the external claims merely defer meaningful action.

We see companies and countries worldwide committing to net-zero goals but the IEA Net-Zero by 2050 report shows these pledges to date – even if fully achieved – still fall short in achieving the Paris Agreement target of a global temperature rise of no more than 1.5 °C.

Further detailed analysis by the Energy and Climate Intelligence Unit (ECIU) and Oxford Net Zero found, after examining the net-zero targets of 200 countries, 1,000 cities and all Forbes Global 2000 companies, too many of the targets lack “substance and short term ambition, leading to greenwashing and marketing deception.” Only 60% of the net-zero targets set interim targets and, 44% published a plan to achieve net-zero.

Other sustainability issues such as diversity and inclusion and human rights – the ‘S’ in ESG – also suffer from lack of rigour. Copious annual disclosures, investor reports, or attractive web pages are no longer sufficient.

The new benchmark is interim targets, ESG performance linked to executive remuneration and climate-related disclosure within financial statements – anything less begins to stray into ‘greenwashing’. Given only 9 of the ASX20 have climate-related disclosures in their financial statements, it’s clear there remains a lot of work even amongst Australia’s leading organisations.

Currently, there is a lack of consequence and impact for an organisation whose current activities constitute what I refer to as “Greenwashing 2.0”.

It is true that over the last decade, a genuine intent to lead, coupled with emergence of sustainability frameworks, standards and credible assurance has reduced – but did not eliminate – the level of greenwashing which was a significant challenge for the industry early on. But the recent “mainstreaming of ESG” has brought in many new claims, commitments and disclosures from organisations who are again prioritising corporate branding over actual performance.

This may, however, be about to change again – due to reporting frameworks and regulation.

The TCFD’s recent consultation period regarding new specific metrics and disclosure requirements is partly in response to the challenges posed by Greenwashing 2.0. The proposed new recommendations include that organisations better disclose climate-related financial impacts such as risks on financial performance, a transition plan to tackle the risks, and all significant emissions, including scope 3 emissions. This framework is becoming mandatory in several countries and could potentially be here as shown by the ‘plan for mandatory TCFD-aligned disclosure in Australia.’

Regulatory consultations are emerging at both a domestic and global level to prevent further greenwashing within an organisation’s sustainability targets, reporting, and initiatives. The Australian Securities and Investment Commission (ASIC) has recognised the threat and identified the risk of ‘greenwashing’ in financial products as a strategic priority in their 2021 – 25 corporate plan. ASIC also recently intervened in an energy company’s initial public offering to seek ‘clarification’ of a net zero claim. This intervention resulted in additional disclaimers and, the removal of the inference of near-term net zero achievement.

Overseas, the International Organisation of Securities Commissions (IOSCO) has established a Board-level Sustainable Task Force (STF), reviewing sustainability-related disclosures for asset managers, greenwashing, and other investor protection concerns. From this review, it is expected IOSCO will require asset managers to take sustainability-related risks and opportunities into account and address the risk of greenwashing through improving transparency, comparability, and consistency in disclosures.

The IFRS Foundation is also about to establish a new board (the ISSB, International Sustainability Standards Board) to develop new standards over the reporting of non-financial information to the capital markets.

It is clear regulation can reduce greenwashing.  The recent Global Sustainability Investment Alliance report showed that Europe reported a 13% decline in the growth of sustainable investment assets between 2018 to 2020. This period reflects the transition when the definition of ‘sustainable investment’ was revised and embedded into legislation in the EU as part of the European Sustainability Finance Action Plan. The decline highlights the inherent greenwashing that was in place but somewhat resolved once regulation was introduced.

Legal risks must also be considered. The recent supplementary Memorandum of Opinion by Noel Hutley QC shows greenwashing not only prolongs climate risks but creates clear legal risks as it can be constituted as misleading or deceptive conduct. Greenwashing includes organisations selectively reporting climate-related disclosures and not demonstrating credible steps to achieve their net-zero commitments. Recently there was a referral to ASIC over perceived misleading and deceptive statements of an Australian fossil fuel company.

Climate-related targets and other ESG targets/disclosures must be rigorous and underpinned by appropriate governance, strategy, and action and verification processes and controls.

But targets and commitments are only effective if accompanied by a system of accountability and enforcement. Anything less is merely Greenwashing 2.0.

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