15 June 2023 – Repost from Dr. Jodi York’s substack 

Stay ahead of the tide of greenwashing

Use this opportunity to improve your impact management and decision-making

Greenwashing, defined by ASIC as “…the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable, or ethical”, can be intentional, but it can also arise from poor strategy, low quality data and data management, and sloppy communication.

Regardless of the source, greenwash is a major reputational risk to businesses and asset managers, and thus a material financial risk to investors. Research from the Responsible Investment Association of Australasia (RIAA) last year found that while demand for responsible investment options is increasing rapidly, 72% of Australians “are concerned about greenwashing”, and of these, three quarters would consider switching providers “if they found out their current fund was investing in companies engaged in activities inconsistent with their values”.

What’s changed?

Increased focus on sustainability by investors and other stakeholders is changing expectations for businesses and asset managers, putting a greater emphasis on non-financial reporting and sustainability disclosures in an effort to drive greater transparency and sustainability in decision-making.

Agreeing on and enforcing definitions

Scientifically-based definitions of sustainable activities are being developed in markets around the globe. Arguably it would have been great to have these in the first place to make evidence-based policy, but we’ll take what we can get.

• The EU led the pack with the sensibly named “EU taxonomy for sustainable activities” developed as part of the European Green Deal and released in 2020.

• The UK is hot on its heels with its own Green Finance Taxonomy, which was expected early this year but was delayed in December.

• More than 30 other countries including Australia have either started work on their own taxonomy or finalized one.

These definitions are being used as a basis of regulations to combat greenwashing. In an age of increased transparency, there are fewer places to hide inept or unethical behaviour, and the consequences can be severe. High profile investigations have affected many investors. Last year 26 journalists from nine countries investigated 130 thousand Article 9 funds (the highest sustainability standard in the investments, with a total value of 619 billion euros in a collaborative effort termed ‘the Great Green Investment Investigation’. 

Changing reporting requirements

At the same time, governments and regulators are also introducing new reporting requirements to drive sustainability and transparency for large businesses and investors. 

• More than half of the 120 stock exchanges tracked by the Sustainable Stock Exchanges Initiative have published ESG reporting guidance for their listed companies.  

• The EU introduced the Non-Financial Reporting Directive in 2014, which required large companies to report on their ESG performance. In January 2023, this was expanded with the Corporate Social Responsibility Directive (CSRD), which introduces stricter reporting standards in line with the EU Taxonomy mentioned above.

• The UK introduced mandatory reporting requirements on climate risk and energy use for listed companies in 2019, expanded that to include mandatory TCFD-aligned disclosures of climate related risks and opportunities in 2022, and will be introducing Sustainability Disclosure Requirements (SDRs) based the new UK Green Finance Taxonomy categorisation of which activities can be considered “green”.  The CSRD will require third-party assurance of this non-financial information.  

• In the US, the US Securities and Exchange Commission (SEC) proposed climate-risk disclosure requirements in March 2022 that would expand the annual reporting requirements of publicly traded companies and require disclosure of scope 1 & 2 emissions. The state of California passed the Climate Corporate Accountability Act early in 2023 requiring large companies to disclose emissions. 

Using uncomfortable change to drive better outcomes

For those who stay at the front of the pack in terms of impact management practice, this represents an emerging consensus that is honing in on information that is rigorous, evidence-based, and broadly accepted as material for investors to understand risks and opportunities.  For those who don’t, this is a scary ‘alphabet soup’ of undifferentiable standards and frameworks. Regardless of which camp they sit in, asset owners, investment managers and advisors need to be positioned to meet these changing requirements, and to support investees in markets where these disclosures are becoming the norm.

I’ve been joining other leaders in the field by contributing to research to help investors stay ahead of greenwashing. I encourage you to take a look at interviews I’ve done on the role of theory of change and evidence and verification shared via LinkedIn, and to learn more by checking out the report No More Greenwashing: Driving evidence-based practice in ESG and Impact Investing.   

What about other aspects of emerging best practice?

I believe in validating our hard work as investors and impact practitioners with unbiased third-party standards and using those results both to drive ongoing improvement and to give investors the decision-worthy information they need. This is why when I write reports or advise others on the process, I emphasize publishing results against scientific thresholds, emerging benchmarks, and practice standards like the Principles of Responsible Investing, the SDG Impact Standards, and the B Corp Assessment.   

This principle also drives my interest in the PCAF (Partnership for Carbon Accounting Financials) Global Carbon Accounting Standard, the second version of which was released in late 2022. To date, PCAF is the only initiative that provides a global, standardized, robust methodology to measure and disclose the financed emissions of a portfolio. This industry-led and open-source standard is intended to provide transparency and consistency in emissions reporting across various asset classes, allowing for better comparison and tracking of progress towards reducing emissions. PCAF is built on the Greenhouse Gas Protocol and complements other climate finance initiatives including TCFD, the Paris Agreement, the Science Based Targets Initiative and the UN Principles of Responsible Investment. 

While it is still early days, I believe that PCAF has the potential to simplify reporting and take action to reduce emissions and tackle the global threat of climate change. The standard provides a clear and consistent framework for measuring and reporting emissions, which can help to reduce the complexity and uncertainty associated with emissions reporting. By adopting the PCAF, asset managers can be assured that they are following a recognized and credible method for reporting emissions, which can help to increase the reliability and transparency of emissions reporting. This can make it easier for businesses to communicate their emissions and progress to stakeholders, including investors, customers, and regulators. 

What’s next?

The International Sustainability Standards Board (ISSB) has announced that it will issue its first two finalised frameworks in June, with an expectation that the first corporate reports aligned with these frameworks will be issued in 2025. We’re all hoping (and actively working toward the dream) that the ISSB will be the Rosetta Stone. It is an attempt to define the “core baseline” of sustainability reporting, unifying disclosures on key issues like waste and emissions and showing companies once and for all how to integrate reporting by linking sustainability-related and financial information.

Then again, I’ve been having these optimistic discussions since the early 2000s, so perhaps we should manage our expectations a bit more realistically?