The Rising Tide against Greenwashing

How are governments and regulators responding to the sharp increase in public concerns around ESG practice?

Governments and regulators are introducing new ESG-related standards that will assess how organisations engage with their ESG responsibilities. There is a strong focus on identifying and tackling ‘bad behaviour’, particularly among companies making claims of ESG compliance when their organisation does not act responsibly. In some countries, laws have been implemented to prevent organisations from actively deceiving the public and stakeholders about their ESG credentials. 

How does the World Economic Forum define greenwashing? 

Greenwashing is a corporate behaviour defined by the World Economic Forum (WEF) as “exaggerating green credentials, and/or portraying products, activities or policies as producing positive environmental outcomes, when this is not the case”. 

Why is a ‘green valuation bubble’ a real risk for investors? 

In financial markets, professional investors have noted that if the value of a business is overstated because of false ESG claims, that’s likely to inflate a ‘green valuation bubble’, risking a market crash when the bubble bursts. This group of stakeholders therefore has a sound practical and commercial reason for checking on ESG honesty. Independent research suggests that more than half of investment firms who claim to be ‘climate positive’, don’t in fact comply with ESG standards.

How is the Sustainable Finance Disclosure Regulation (SFDR) helping to demystify which businesses are actually complying with ESG standards? 

The European Union has introduced rules that force firms to disclose the social and environmental impact of their activities. This regulation is called the Sustainable Finance Disclosure Regulation, or SFDR. SFDR compels professional investors to report plainly on how well, or how badly, their investee businesses meet ESG standards.