From Greenwashing to Standardization
This week lets take a look at a couple of important ESG News Items that may impact all of us....
Another busy week in the world of ESG, as the SEC announced ESG as an Examination Priority in follow-up to the mandatory climate disclosures the week prior. Specifically, in 2022, ESG will be the second priority of its examination division, meaning they will “focus on… whether RIAs and registered funds are accurately disclosing their ESG investing approaches . . . [and] whether the voting of client securities align[s] with their ESG-related disclosures and mandates, and whether there are misrepresentations of the ESG factors considered or incorporated into portfolio section.” source
This latest announcement follows comments in March by Securities and Exchange Commission Chairman Gary Gensler, who has committed the SEC to clamp down on Greenwashing of investment funds, and similar warnings in February and January in which the exchange made commitments to take direct aim at greenwashing.
ESG funds account for over 10% of worldwide fund assets, and the money held in ESG focused exchange-traded funds rose globally by 53% in 2021 to $2.7 Trillion. Bloomberg projects those assets will reach $52 Trillion by 2025 and represent a third of global AUM. So this is big business, and with big dollars comes increased scrutiny.
The business school example of potential consequences points to the 2015 Volkswagon scandal, which came to be called “Dieselgate.” While the manufacturer made environmental claims regarding how their product was better for the environment, they also installed software to “tick” the emissions tests for favorable results. The resulting recalls and punitive actions taken have added up to over $30 Billion and left a massive hit on corporate reputation and trust with consumers.
As sustainability professionals, one of our many roles is to protect our organizations against greenwashing and to ensure that the steps we take towards sustainability are honest and include:
Identifying data and establishing a baseline: A foundational step is understanding your current state. Without understanding where you are, you cannot realize when or if you are making progress towards goals, and you really don’t know if your goals are realistic.
Set Realistic Goals and track progress: It takes a lot to set a goal, and while it is true, “what gets measured gets managed,” the complexity of carbon emissions further complicates this. There are many moving parts here - not only efficiency, performance tracking, and benchmarking but also understanding the energy generation source and carbon intensity. Before setting out and staking a claim on a goal of net-zero, you need to know where you are and what steps you can realistically take to get there.
Commit to transparency and accuracy: Bad data results in bad decisions, and of course, outright making false claims can lead to legal consequences. If you claim an ESG attribute, it must be backed up with honest evidence. One of the most telling clues of greenwashing is when an organization uses words to describe its actions instead of numbers. Genuine ESG efforts are backed by actual data and metrics to back up those claims.
Poll after poll reveals that consumers are placing greater importance on sustainability and reducing their impact. From the foods they buy and the home they choose, the office they work at, and the car they drive, we can see that environmental awareness is increasingly becoming part of the purchasing decision.
We are surrounded by data; in the palm of most of our hands sits a supercomputer in the form of our smartphones which can quickly research and guide purchasing decisions. Ask a Generation Z’er where they want to eat (and more than a few Millenials and Generation X’ers), and chances are they will pull out their phone and start researching. Yelp, Eater, Instagram, Google, etc. The new normal is that consumers are motivated by social norms to value information, and visibility allows consumers to understand the actual value before making purchasing decisions.
This makes it easier for consumers to look deeper into companies’ claims. Recognized third-party certifications can help here, as one of the tell-tale signs of greenwashing is to make claims without certifications. Words like natural, clean, earth-friendly, and eco-friendly have no actual meaning and are examples of buzz words consumers are told to be wary of. After all, arsenic is natural, now isn’t it?
For a deeper dive into ways to avoid greenwashing, see this article by Danna Hileli on our Conservice ESG team: Three ways to avoid greenwashing in your ESG Marketing Strategy
Last week, the other big ESG news was the IFRS Foundation and GRI agreeing that their respective standard-setting boards will coordinate their work programs and standard-setting activities.
The initial step of this initiative was at COP26 when the IFRS Foundation announced the creation of the International Sustainability Standards Board (ISSB) to develop a single comprehensive global baseline of investor-focused sustainability disclosures for capital markets.
Last week’s announcement advances that goal by bringing in the influential GRI for collaboration and ensuring compatibility and interconnectedness of investor-focused baseline sustainability information. The vision is beginning to take shape with the IFRS Sustainability Disclosures interacting with GRI sustainability reporting requirements.
Just days later, the ISSB of the IFRS announced that it will embed the industry-based approach used by SASB into its standard-setting process, bringing in yet a third framework; in addition, the ISSB will:
Include SASB standards in the two published exposure drafts.
Commit to improving the international applicability of SASB standards.
Use SASB standards as the starting point for the ISSB’s industry-based requirements.
Transition the SASB’s ongoing projects to the ISSB and continue them.
Encourage preparers and investors to continue to use the SASB standards in this transition phase.
Not to be left out, the ISSB is also building on the TCFD framework to further create consistency, comparability, and reliability across climate disclosure.
To this end, the ISSB has released two draft standards for comment, with comments due by July 29, 2022. According to Financial Management, in an article by Oliver Rowe, the two drafts include:
S1 General reporting requirements:
Would require an entity to disclose material information about all the significant sustainability-related risks and opportunities to which it is exposed;
Includes proposed requirements and guidance to support the disclosure of material information about significant sustainability-related risks and opportunities not specifically addressed by an IFRS sustainability disclosure standard;
Would require an entity to explain the connections between different pieces of information, including between various sustainability-related risks and opportunities and information in the entity’s financial statements;
Would require disclosure of sustainability-related financial information as part of, ie, at the same time as, the entity’s general-purpose financial reporting.
S2 Climate-related disclosures
The proposed climate-related disclosure standard would require an entity to provide information that enables financial reporting users to understand:
Governance. This would include the governance processes, controls, and procedures an entity uses to monitor and manage climate-related risks and opportunities.
Strategy. This would include the climate-related risks and opportunities that could enhance, threaten, or change an entity’s business model and strategy over the short, medium, and long term, including:
Whether and how information about climate-related risks and opportunities informs management’s strategy and decision-making;
The current and anticipated effects of climate-related risks and opportunities on its business model;
The effects of climate-related risks and opportunities that could reasonably be expected to affect the entity’s business model, strategy, and cash flows; its access to finance; and its cost of capital over the short, medium, or long term; and
The resilience of its strategy (including its business model) with respect to climate-related risks.
Risk management. This would include how climate-related risks and opportunities are identified, assessed, managed, and mitigated by an entity.
Metrics and targets. This would include the metrics and targets used to manage and monitor an entity’s performance in relation to climate-related risks and opportunities, including:
Performance and outcome measures that support the qualitative disclosures across governance, risk management, and strategy disclosure requirements; and
Targets that an entity uses to measure its performance goals related to significant climate-related risks and opportunities.
If you would like to dig deeper into the IFRS exposure drafts of their first two proposed standards, they can be found here:
If you would like to provide comments on the drafts, you can do so here or email commentletters@ifrs.org
You can help reduce the impact of the built environment by sharing this blog with your peers. Together we can impact the 39% of greenhouse gasses attributed to the built environment. It starts with awareness, and we succeed with teamwork.
Stay well!
Chris Laughman is the ThirtyNine Blog author, a blog dedicated to reducing the impact of the built environment. When not blogging, Chris is helping the real estate industry reduce energy and water impact as the Vice President of Sustainability for Conservice, the Utility Experts. Whether Multifamily, Single Family, Student Housing, Commercial, or Military, we simplify utility billing and expense management by doing it for you. Our insight into your utility consumption provides an opportunity to identify risks. Leveraging innovation and experience, we ignite solutions with real impacts and track performance to ensure the trendline stays laser-focused on the goal. At Conservice, we have developed a true bill-to-boardroom solution to help truly make a difference. We have before us a tremendous opportunity. Standing shoulder to shoulder, we will get this done. Contact me at claughman@conservice.com for more information.
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