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Sustainability Reporting and Practice Need to End Their Divorce

By October 11, 2022No Comments

Sustainability is as fashionable today as spandex was in the 1980s, not to say the planet’s future relied on spandex as much as it does on sustainability, of course. There is, however, a critical issue in all of the sustainability furore. Two words: distance and divorce.

Never has there been more distance between sustainability reporting and the organisational practices they communicate. Divorce papers are being filed. Organisations, in the main, are prioritising beautifully written prose in their reports rather than intentional, organisational change.

The articulation of a net-zero transition statement has, to an extent, become more prized more than the merits and short-term action plans that it is grounded on. Chief Executives the world over are delivering more investor presentations on ‘commitments’ toward gender equality at a leadership level than they are on actually getting it done. The crescendo of voices around the disclosure table are drowning out those that are focused on practical solutions.

So, how did we get here?

Green Demands and Littered Standards

Firstly, there is a clear and increasing appetite for services and products with green or ESG credentials, with a growing perception that “green sells”. Flows into ESG funds more than doubled between 2020 and 2021, and on average, more than one third of consumers are willing to pay more for sustainable products or services.

Secondly, the multitude of reporting requirements and standards are difficult to navigate. We discussed the recently published International Sustainability Standards Board (ISSB) exposure draft standards, an encouraging step in harmonising the practice of sustainability reporting. However, the existence of ISSB in itself indicates that reporting standards have become too plentiful, too expansive, and too littered with minutiae.

This myriad of standards and frameworks peppering an already fragmented reporting landscape have shown us how ill-equipped organisations are with determining materiality, stakeholder engagement, and defining the limits between proprietary information and the public good.

To Mislead or Not to Mislead

It is therefore easy to see why it is attractive to publish sustainability reports with loosely measured roundabout outcomes. Quite frankly, it can seem alluring to whisper sweet nothings into a stakeholder’s ear if it means that you do it once a year and move on.

However, the temperature and the focus of the debate on organisations not being transparent and honest is only going to increase. As Norton Rose Fulbright warns, “We are likely to see more greenwashing claims as public attention on climate change continues to grow and sustainability becomes increasingly important in consumer and investor decision-making. Regulators will be more proactive and new sanctions for greenwashing will be introduced.”

Below are examples of companies being held accountable over greenwashing:

BNY Mellon Investment Advisor

Recently, the US Securities and Exchange Commission (SEC) fined BNY Mellon Investment Adviser $1.5m following “misstatements and omissions” about its ESG approach to managing funds.

DWS

Earlier this year, German law enforcement officials raided the offices of Deutsche Bank on suspicions that its DWS Group had been falsely advertising so-called ESG financial products as being green and sustainable. The DWS CEO, Asoka Woehrmann, stepped down soon after. The raids and departure of the CEO marked another setback for Deutsche Bank.

Firstgas Group

The New Zealand ASA Complaints Board investigated a natural gas distributor, Firstgas Group, for claiming that its gas “is going zero carbon”. The advert was found to be an unsubstantiated environmental claim and Firstgas Group were ordered to remove it.

Vale SA

The SEC is suing Vale SA, one of the world’s largest producers of iron ore, for allegedly manipulating safety audits and sharing misleading ESG disclosures ahead of a 2019 dam collapse that killed 270 people and unleashed a river of toxic mining waste.

Organisations caught green-handed with false or unsubstantiated claims are facing damaged reputations, fines, and stakeholder and investor backlash.

Reconciling What is Said with What is Actually Done

As concerns around greenwashing increase, it is important for organisations to implement the right systems and processes to accurately measure material data points surrounding their sustainability efforts, and to provide the factual verification of any claims made.

Below, we highlight tips on how to manage and prevent greenwashing risks:

  • Familiarise yourself with a framework that is applicable to your objectives and industry. For example, the Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) both provide a range of metrics that can be used for reporting. SASB has also created a Materiality Map that provides suggestions on which metrics are likely to be material for specific industries.
  • Become a signatory to an international standard, such as the United Nations Principles for Responsible Investment (UN PRI), increasing your credibility.
  • Embed your ESG strategy into your overall business strategy. This can help you determine what you need to manage, track, and report on, and ultimately achieve sustainable, profitable growth.
  • Before publicly sharing forward-looking statements, such as sustainability targets, ensure:
    • The targets are evidence-based.
    • There is a reasonable basis and plan for the target.
    • There are processes in place to ensure ongoing compliance with continuous disclosure obligations.
  • Do not treat sustainability reporting as simply a marketing document. It needs to be based on information and metrics that are accurate, measurable, and verifiable.
  • Consider allocating more time and resources to sustainability management. Not only can this enhance a company’s ESG efforts, but it can also help set the tone at the top, as the board and senior management influence a company’s guiding principles and values.
  • Consider allocating more time and resources to training. By educating staff on your ESG efforts, you ensure that messages, objectives, and goals are consistent throughout your organisation.
  • Stay on top of industry developments to ensure you understand what regulators are wanting.

Key benefits of measurable and verifiable claims include:

  • Stakeholder trust and buy-in.
  • A social license to operate.
  • Positive consumer perception and preference.
  • Employee attraction and motivation.
  • Simply good business practice.
  • Defendable metrics.
  • Reduced risks.

How EBS Can Help You

At EBS Advisory, we can help you implement the right systems and processes to accurately measure and communicate your ESG efforts.

We also track the explosion of myriad standards, all professing to be the best tool, standard or benchmark to evaluate your initiatives. We understand that not all standards are the same, nor do they appeal to the same investor base. We can assist you in determining the right external standards for your strategic goals and investor mix.

Let’s set up a chat to discuss how we can help you with your greenwashing risks and concerns.