20 May 2024
Greenwashing vs. Greenhushing
How do companies find the right balance with ESG?
The term ESG turns 20 this year. The UN coined the acronym in a paper Who Cares Why? Its purpose was to provide the financial sector with recommendations on integrating ESG considerations that could have a material impact on investments.
Fast forward two decades and investors are turning their backs on ESG due to greenwashing concerns. According to reports, nearly GBP 2.5 billion flowed out of ESG-focused funds between May and October last year.
According to Gallagher’s latest research, nearly two-thirds (62%) of senior leaders at large UK businesses are concerned that their ESG targets put them at risk of litigation, with close to three quarters (72%) admitting they felt pressure to set the targets without being sure on how they were going to reach them.
E&Y’s 2023 Sustainable Value Survey, found that one in five companies declined to publicly release their sustainable goals in 2023. Yet its 2022 Corporate Reporting and Institutional Investor Survey found that 99% of investors use ESG disclosures as part of their decision-making, but 76% felt that companies are highly selective in the type of information that they provide.
How do companies find the right balance and ensure they provide the most accurate and commercially beneficial ESG information without exposing themselves to undue risk?
What is Greenwashing?
The lack of a legal, binding definition of greenwashing presents real issues for regulators and the insurance industry alike. The playing field is becoming increasingly complex, and new terms keep cropping up faster than any regulatory framework can accommodate them.
- Greencrowding: The practice of hiding in a group and being the slowest adopter of sustainability policies.
- Greenrinsing: Where companies regularly change ESG targets before they are achieved.
- Greenshifting: Where companies focus on their customers and their responsibility rather than their own.
- Greenhushing: When organisations choose to deliberately underreport or hide their green credentials from public view to evade scrutiny.
- Greenlabelling: Refers to the practice of companies using unsubstantiated environmentally friendly labels on their products.
- Greenwishing: Where companies feel pressure to set ambitious targets which they have every intention of meeting but lack the means to do so.
- Greenbleaching: Specifically refers to when asset managers play down the sustainability credentials of their funds to avoid extra regulatory requirements
ESG has been on the radar of businesses for several years, but now more than ever it is front and centre of corporate strategy. ESG factors are now a key consideration for investors, stakeholders, and customers and companies with strong ESG practices are more likely to attract investment, retain customers, and build trust with stakeholders. Conversely, poor ESG performance can lead to reputational damage, legal liabilities and financial losses.
James Bosley, Head of Climate Strategy, Gallagher Specialty
ESG Regulation
Regulatory activity this year is set to prove that actions speak louder than words when it comes to sustainability reporting and greenwashing.
The EU is upgrading its disclosure requirements this year. The EU’s Sustainable Finance Disclosure Regulation (SFDR) came into force at the start of 2023 with an aim to set clear disclosure requirements that help investors and consumers make more informed investment decisions and contribute to the sustainable transition. The European Commission has conducted a post-implementation review, and the report is expected to be published in Q2 2024.
The SFDR requires asset managers to classify a fund as an article 6, 8 or 9.
In its 2024 ESG Barometer Report, Mainstreet Partners found that nearly a quarter (24%) of all article 8 funds could be accused of greenwashing based on their sustainability framework and practices.
Article 6: Funds without a sustainability scope
Article 8: Funds that promote environmental or social characteristics
Article 9: Funds that have sustainable investment as their objective
The EU’s Corporate Sustainability Reporting Directive (CRSD) started a phased application in January. Its goal is to improve disclosure and provide the data investors need to determine a company’s sustainability. The CSRD will set the standard by which nearly 50,000 EU companies must report their climate and environmental impact.
In the UK, new disclosure and labelling regimes for asset managers and distributors will apply in phases starting in July. Also a new anti-greenwashing rule for all authorised firms comes into force in May. It intends to apply the ‘fair, clear and not misleading’ standard within the financial promotions regime to sustainability statements.
The Securities and Exchange Commission’s (SEC) Climate Change Disclosure Guidelines were expected to be finalised in early 2023 but were enacted in March this year and are already the subject of litigation.
More focused on consumers, in March 2022, the European Commission published its proposal for the Green Claims Directive, which aims to combat greenwashing by establishing clear guidelines for companies on promoting environmental claims. In February, the European Council adopted this directive, which will require businesses to substantiate their environmental claims with a comprehensive assessment and also tighten the rules regarding the approval of new environmental labels.
In September 2021, the UK Competition and Markets Authority (CMA) published its Green Claims Code (Code) and accompanying guidance. The code sets out six principles specifying that environmental claims must:
- Be truthful and accurate
- Be clear and unambiguous
- Not omit or hide material information
- Only make fair and meaningful comparisons
- Consider the full lifecycle of the product or its service
- Be substantiated
Regulation in this area is set to become more stringent. The UK Digital Markets, Competition and Consumers Bill is currently in the House of Lords. Upon receiving Royal Assent, the Competition and Markets Authority (CMA) will have direct powers to enforce breaches of the Consumer Protection from Unfair Trading Regulations 2008, as opposed to them going through the courts. If the CMA finds a breach, which includes making false or misleading sustainability statements, it has the power to impose fines of up to 10% of annual turnover.
UK fines relating to claims, pricing, misleading actions, or emissions have never exceeded GBP 1 million. However, under the new rules, if a business's annual turnover is GBP 50 million, it could face a GBP 50 million fine. This equates to a dramatic increase in risk for businesses. Meanwhile, the Financial Conduct Authority’s consultation on its guidance on the anti-greenwashing rule closed at the end of January.
The US Federal Trade Commission also has plans to update its Green Guides for the first time in more than a decade this year with new recommendations on claims around sustainable materials.
ESG may have existed for 20 years, but it is now at the forefront of corporate strategy. As the energy transition progresses, consumers, investors, and talent are all increasingly focused on sustainability, and a company’s ESG credentials can act as a powerful differentiator.
Regulation is evolving, and organisations now face more stringent reporting obligations. While one main objective of new ESG legislation worldwide is undoubtedly to set clear requirements that help investors and consumers make more informed investment decisions, the lack of standardisation and precedent is understandably problematic for companies.
When businesses are considering how they report on ESG, they must consider their risk model alongside their sustainability ambitions and ensure that both are comprehensive and robustly formulated. An independent ESG assessment can provide data-driven insights into the perception of a company relating to material ESG matters and how this may give rise to legal or regulatory exposures affecting the company and its directors and officers.
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Selina Walkley
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Selina_Walkley1@ajg.com
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