Greenwashing is the action of intentionally misleading the public with dishonest information about product, service or company’s Environmental, Social and Governance (ESG) standards. The reason this is happening is due to the growing importance of green’ practices with regards to the long-term sustainability and financial success of the business. Much more than a buzzword, the three tenets of ESG are now considered to hold the same weight as financial considerations when making crucial corporate policy.
Even though not all aspects of ESG are relevant to every business, compliance to the relevant pillars is essential, as ESG resonates strongly with today’s stakeholders. This includes both consumers and investors who are increasingly interested in alternative investment opportunities.
Why does it matter?
In simple terms, customers, investors and employees have the right to know what they are buying (or buying into) and where that organisation stands with regards to ESG standards and alternative investment opportunities. There have always been unscrupulous businesses and also regulations requiring transparency, with clear guidelines and legal requirements to prevent misrepresentation.
80% of consumers would change to greener brands
According to Bruce Simpson (CEO of the Stephen A. Schwarzman Foundation and senior ESG and Purpose adviser to McKinsey), investing in ESG practices is important to customers. In fact, 80 per cent would consider changing to a brand that better fits their personal values. This figure clearly illustrates the pull of ESG sustainability and the importance placed on ESG standards.
With this figure in mind, it comes as no surprise that an increasing number of less-than-honest organisations profess to be greener than they really are. KMPG’s white paper, “Crackdown on greenwashing” suggests a correlation between the growing importance of ESG considerations in business decisions and ESG investing and the rise in unsubstantiated ‘green’ and ‘sustainable’ labels by duplicitous companies.
ESG sustainability standards have not only opened the floodgates for greater scrutiny from all parties but also ever-increasing regulation and reporting requirements. A study by IFAC-AICPA & CIMA found that, 95% of larger companies filed ESG reports in 2021, which represents a 91% increase from 2019. A trajectory that is set to continue. The report also notes that although there is a foundation for consistent sustainability assurance, as yet, there seems to be a disconnect and lack of framework which hampers consistent and comparable reporting.
The seriousness of false and dishonest ESG claims is succinctly laid out in this article, ‘Financial materiality: Understanding the financial performance of ESG strategies’ by Ingo Steinhaeuser (Thomson Reuter): “As ESG factors become increasingly important in investment decisions, the question of ESG factors’ financial materiality informs the discussion from both a legal and financial perspective. Legally, ESG factors (that will influence ESG investing) that are misleading or inaccurately reported could be a basis for liability”.
FCA new greenwashing rules
In the UK, the Financial Conduct Authority (FCA) is ready to take action by introducing new measures. Sacha Sadan, Director of Environmental, Social and Governance explains,” “Greenwashing misleads consumers and erodes trust in all ESG products. They must be confident when products claim to be more sustainable than they actually are. Our proposed rules will help consumers and firms build trust in this sector. This supports investment in solutions to some of the world’s biggest ESG challenges and places the UK at the forefront of sustainable investment internationally. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.”
The package of rules proposed by the FCA include:
- Introduction of three categories of sustainable investment labels
- Restrictions of the use of ESG, green and sustainable
- Consumer-facing disclosures to help understand sustainability features
- More detailed disclosures for institutional and retail investors
- Clear and assessable consumer-facing disclosures by distributors of financial products
David Viera, Managing Director of RA-ESG, explains, “Our group focuses and trades solely within the sector focusing on sustainable energy solutions, solar energy, EV charging stations, wind turbine farms and research. Unfortunately, the practice of greenwashing can cause a fair amount of confusion surrounding this sector. The recent announcement that the FCA is bolstering regulations to stamp out this practice is a crucial step towards greater transparency.
Penalties for greenwashing
Of course, the problem is becoming increasingly difficult to ignore on a global scale. The FCA’s US counterpart, the Securities and Exchange Commission (SEC), recently slapped a 1.5million US dollar fine on an individual US-based investment advisor of a large global investment bank, for misstatements and omissions regarding the banks ESG standards, investment bonds and fund management. Similarly, the EU body, European Securities and Markets Authority (ESMA) is currently beefing up its rulebook.
Reputational damage
Consumers, employees, investors and suppliers are now placing green credentials at the top of their shopping list when choosing a brand or looking for an alternative investment opportunity. If a company takes part in ‘greenwashing’ the reputational risk immense and can have a devastating effect on shareholder value. The prevalence of social media ensures that any scandals and stories will not quietly disappear. And the companies that don’t implement ESG management strategies will see consumers move to more environmentally friendly suppliers, investors will seek more ESG compliance funds and employees will work for more enlightened employers.
In conclusion, greenwashing is a very real problem which is being addressed by a shift from voluntary towards increasingly mandatory regulations, reporting and hefty penalties. Companies accused of greenwashing can expect to be taken to court and fined, and as a result will experience considerable reputational and commercial damage. As one US investment advisor found to his cost…when caught out, the penalties can be punitive and personal!
If you would like to know more about RA-ESG.com’s ESG renewable energy investment opportunities, visit www.ra-esg.com or email info@raesg.x-co.dev.
