Rob Fisher - KPMG U.S. ESG Leader
Maura Hodge - KPMG U.S. ESG Audit Leader
Bridget Beals - KPMG U.K. Partner, Co-Head of Climate Risk and Strategy
This article was first published in ESG Today
From top companies committing to net-zero emissions targets to national and international bodies crafting standards and regulations, reporting on ESG topics is quickly becoming a norm of doing business in 2023.
With this trend, investors are gaining an unprecedented look into the impact that companies’ operations have on the environment and the impact that the environment has on companies’ operations. And with the latest frameworks incorporating both qualitative and quantitative disclosure guidance, ESG reporting is beginning to look a lot like financial reporting.
However, guidance on financial results is closely monitored and managed. And while financial statement reporting follows standards and incorporates robust controls that result in consistency, accuracy and comparability of data and disclosures, ESG reporting does not yet require that same standard of rigor. As a result, a discrepancy can emerge between what a company claims it is doing and what it is actually doing. While often unintentional, this discrepancy is nevertheless harmful to investors, customers, employees and others who rely on this information when making decisions.
The colloquial term for this phenomenon, particularly as it relates to sustainability, is greenwashing, and it’s far from novel. But newer terms to the vernacular such as “greenhushing” and “greenwishing” are taking hold. Here’s a quick rundown:
Intentional or not, the consequences for engaging in these behaviors can be severe. Brand reputation, of course, is at stake, as is business opportunity. And both can manifest in a company’s financials, particularly if greenwashing results in a higher cost of capital.
Investors are on high alert, and regulators have proposed rules designed to drive strategic action around ESG, and consequently, raise the standard for ESG reporting. The U.S. Securities and Exchange Commission (SEC), for example, has proposed regulations for the naming of investment funds, which would expand the application of the Names Rule — a policy requiring at least 80% of assets in a fund to reflect its name — and cut down on the use of misleading ESG terminology. And should the SEC climate disclosure rule require ESG disclosures within the financial statements, that information would be subject to audit — another safeguard against faulty reporting. Final rulings on both topics are slated for fall 2023.
Looking abroad, the Sustainable Finance Disclosure Regulation (SFDR) in the European Union is taking steps to improve the transparency and comparability of ESG in financial products such as funds. Through its classification system, a fund can be labeled “standard,” “promoting” or “having the objective of,” enabling investors to better compare funds and analyze the ESG-related impacts of the investment, known as Principal Adverse Impact indicators. While the SFDR directly applies to companies that make financial products available to end customers, its impact is likely to extend to their investees like multinational companies and may trickle down to private markets as well.
In the United Kingdom, the Sustainability Disclosure Requirements is a package of reforms requiring companies to implement the Green Taxonomy and follow recommendations from the Task Force on Climate-related Financial Disclosures and, subject to consultation, the International Sustainability Standards Board. The reforms also include guidance for transition planning and private company disclosures.
These current and proposed requirements only scratch the surface. While the primary focus is certainly on enhancing the quality of ESG reporting, the implicit message about greenwashing – and greenhushing and greenwishing – is clear: As disclosure requirements become more rigorous, the quality of ESG reporting will improve and, in turn, diminish the risk of greenwashing.
Despite regulatory guardrails, it is easy to fall victim to greenwashing tendencies. However, there are several steps companies can take to mitigate these risks while still capitalizing on ESG opportunities:
Ultimately, people want to do business with and work for companies they trust, and it’s the companies that transparently share the who, what, when, where, why and how of their ESG strategy and reporting program that will earn that trust. After all, even in this evolving regulatory environment, ESG is not just about compliance – it’s about driving value, building a competitive advantage and promoting long-term resilience.
For more on greenwashing, greenhushing and greenwishing, check out this LinkedIn Live.