Businesses Are Struggling To Find The Right Balance On Sustainability Reporting

“Green is good” has been the big business mantra for a while now. However, the corporate love affair with the idea is currently being put to the test. It’s going to take a renewed focus on hard data and quantifiable metrics to get things back on track.

After a long courtship phase around all things sustainability and environmental, social and governance (ESG), where companies worked hard to burnish their sustainability credentials and portray the best versions of themselves in slick sustainability reports, advertisements and press releases, investors, customers and now regulators have stepped in and started questioning the veracity of some of these claims. In response, many companies have simply stopped talking about sustainability.

ESG Backlash Gets Real

According to one analysis, the number of mentions of the words “environmental, social and governance,” “ESG,” “diversity, equity and inclusion,” “DEI,” or “sustainability” on corporate earnings calls of U.S.-listed companies, declined 31% in April-June of 2023 versus the same period a year earlier. Likewise, asset managers have been increasingly dropping the word “sustainable” from the names of their funds. In the first half of 2023, 44 sustainable funds removed the label from their brand names. That’s in stark contrast from 2022 when 99 funds added the word “sustainable” to their titles.

At the center of this rise in so-called green hushing is the threat of investor backlash and growing government scrutiny over the accuracy of green claims, which have made it risky to even utter the word sustainability these days. In fact, a dozen of the biggest asset managers, private equity firms and brokers listed anti-ESG efforts as a risk in their annual reports, this year.

One can’t help but picture the C-suites of the world’s largest corporations deciding that discretion is the better part of valor and ducking back down below the parapet. However, that is not a particularly thoughtful business strategy and—in light of the rising tide of global regulation and legal actions focused on corporate sustainability reporting and greenwashing— it is not a viable long-term solution,

Corporate Sustainability Mandates Loom Large

Governments around the world have already started introducing rigorous sustainability reporting requirements for big businesses, while at the same time setting stronger standards to fight greenwashing activities. Soon, companies will have little choice on whether or not they share their sustainability initiatives publicly, and have no doubt, those disclosures will be scrutinized. Initiatives such as the Corporate Sustainability Reporting Directive (CSRD) and its associated European Sustainability Reporting Standards (ESRS) in Europe, along with new reporting standards introduced by the International Financial Reporting Standards (IFRS) and its International Sustainability Standards Board (ISSB), will increasingly dictate specific sustainability-related disclosures that companies will need to make. Importantly, these disclosures will ultimately need to meet the same rigorous criteria as financial reporting disclosures.

In addition, several jurisdictions have introduced measures to root out greenwashing by strengthening the existing law, proposing new legislation and developing further quasi-legal instruments that can be enforced by courts or regulators. These include two separate (but related) proposals in the European Union (EU): the Empowering Consumers for the Green Transition Directive, which would ban companies from using general environmental claims such as “environmentally friendly” and “natural” unless they can provide detailed scientific evidence to support them, and the Green Claims Directive, which would set minimum standards applicable to businesses operating in the EU to assess their own environmental claims and detail whether or not their products meet the claims they’ve made. Proposed penalties for failing to meet these standards include fines of up to 4% of the company’s annual turnover in countries where the infringement occurs and a confiscation of all revenues from transactions relating to those infringing products.

In the U.S., the Federal Trade Commission (FTC) is reviewing their Green Guides, which outline standards by which companies can make environmental claims in their product marketing activities. While these are not technically laws, the FTC does have the power to take companies to court for making claims inconsistent with the Green Guides, so they have the same effect. Meanwhile, the U.S. Securities and Exchange Commission (SEC) has also been actively enforcing greenwashing standards through its Enforcement Task Force Focused on Climate and ESG Issues, and recently find an asset manager $19 million for making misleading statements regarding its ESG investment process.

In Asia, Korea is poised to become the first Asian nation to pass a law specifically addressing greenwashing. Under the proposed Amendment to Environmental Technology and Industry Support Act, the Korean Ministry of Environment will be able to issue a 3 million Won, approximately $2,200 USD, fine to companies that have mislead the public about their environmental impacts and green credentials. Commentators expect this fine to increase in the future.

In the UK, the Competition and Markets Authority (CMA) is investigating how companies are marketing some products and services as being “eco friendly” or making environmental claims which could potentially result in consumers being misled. They are focusing on whether such claims are supported by evidence and, interestingly, whether consumers are being misled by an absence of information about the environmental impact of products and services.

Turning to Data

This creates a tough scenario for businesses. Say nothing about sustainability and you’ve got one set of problems. Say too much and you’ve got a different set of problems. Fortunately, there is a solution that has the power to address disclosure requirements, meet the burden of proof for greenwashing claims regulation and quiet the critics who feel companies are spending too much time on sustainability. It’s the data. It’s always the data.

By focusing on the structural, elemental aspects of sustainability risk, measuring and reporting those data points in a clear, concise and standardized manner and drawing clear links between those individual metrics and their impacts to the corporate balance sheets, corporations can transcend the politics and the potential accusations by focusing on quantifiable metrics. Put simply: businesses need to treat sustainability reporting like financial reporting. Start thinking about CSRD, ESRS and ISSB like Sarbanes-Oxley, Dodd-Frank and MiFID instead of some new breed of reform we’ve never seen before.

Just as we’ve seen in financial regulation and reporting, the long journey to more sustainable business practices will hit some rough patches along the way, but the data will not just set businesses free, it may also allow them to gain competitive advantage when used properly.