ESG reporting is triggering a backlash from investors, activists, and regulatory agencies. The mechanisms that are supposed to make it easier for investors and activists to support like-minded entities with purchases, venture capital, or stock buying often fail due to ESG reporting concerns. Discover more about these concerns, what agencies and governments can do to improve ESG accounting standards, and how businesses can proactively avoid reporting issues.
ESG Reporting Concerns
In September 2021, financial news outlets exploded with commentary on leading financial service provider Deutsche Bank AG’s ESG reporting woes. The firm’s DWS Group was accused of potentially misrepresenting environmental and social credentials of investment products that it had labeled ESG.
It’s not the first — or the last — potential greenwashing issue. Companies, hedge funds, and money managers can be tempted to engage in inaccurate reporting to make products and opportunities look more attractive to the growing number of conscientious investors and buyers in the markets.
The concern is that those seeking to bolster the bottom line by looking attractive to ESG impact investors are muddying the ESG waters — which need to be kept pristine to ensure the ESG label has any value at all.
Greenwashing in the Regulatory Crosshairs
Regulators are stepping up enforcement to reduce greenwashing and malevolent reporting that leads ESG private equity astray. And when the regulatory crosshairs hover over a target, that company can expect a backlash in the markets.
The SEC says it’s taking an “all-inclusive agency approach” to the need for better ESG reporting. Just a few examples of the steps the SEC has taken to address these issues include:
- Looking specifically at climate-related disclosures in public company filings
- Creating an enforcement task force focused on ESG and climate issues
- Working toward sustainable regulations for ESG reporting that cut down on greenwashing and other problem behaviors
DWS Group Share Declines
Even the potential for ESG reporting issues can be a problem for companies’ brand reputation and bottom line. As a result, the SEC joined the investigation into DWS Group’s ESG reporting issues, and the response in the market included a stock value drop of 13.6% in one day.
Financial Conduct Authority in the UK
The Financial Conduct Authority in the UK publicly published a letter to the Chairs of AFMs. The letter defined expectations for fund managers concerning ESG and called out greenwashing efforts affecting the UK’s climate change mitigations.
The messaging is clear: Regulatory entities across the globe are gearing up to look at ESG reporting more carefully.
Proposed ESG Reporting Regulations
The UK government is working on a new strategy to combat greenwashing and other regulatory concerns, including creating new Sustainability Disclosure Requirements for asset managers and businesses.
Climate-Related Financial Disclosures
Climate-related financial disclosures, often mandated under certain governments, are part of ESG reporting. Even when these disclosures aren’t flagged as ESG or related to ESG-labeled assets, they may still fall under current and upcoming regulations on how companies must report such information.
Pressure From Environmental Groups
On top of regulatory requirements, agencies, investors, and businesses face increasing pressure from environmental groups. Groups are pushing for changes that will better hold companies accountable for reporting that misleads investors and others about their ecological impact as well as the negative impacts themselves.
How To Improve ESG Accounting Standards
It’s clear from the present situation that ESG accounting standards can be improved. In fact, the current confusing environment makes it more likely that companies may fail to produce satisfactory reporting as they scramble to hit what seems like an ever-moving regulatory target. Here are recommendations for improving ESG reporting standards:
Adopting a Global Baseline Climate Standard for ESG
Numerous nations, including the US, UK, and India, have current reporting standards and are adopting new, more robust regulations. But businesses don’t always report in a domestic-only environment, and investors have an increasingly global approach. Not to mention, environmental and social impacts matter across borders.
Adopting a global baseline, primarily for climate standards related to ESG reporting, lets everyone start from the same place. It also makes it easier for businesses to comply with multiple regulations.
Promote Alignment of ESG Measurement and Disclosure
ESG criteria have, to date, been somewhat subjective. Developing a standard measuring stick of sorts and methods for accurately disclosing those measurements is vital for all entities involved. It’s not enough to assume ethics and social responsibility will lead companies in the right direction; clear mark points help all organizations.
Set Actionable Targets To Achieve and Demonstrate Real Progress
Some sources of pressure in the ESG space may be working with unactionable or unrealistic goals. Creating actionable targets that look to change realistic timeframes supports more impactful ESG reporting. ESG reporting becomes less of a checklist item and more of a partnership activity in this environment.
Use Real Political Capital To Achieve Policy Change
Governments that step away from only talking about solutions and start walking the way toward ESG policy change can be leaders in effecting those changes. That creates natural political capital and reduces government issues with ESG movements. It also creates a foundation to foster partnerships domestically and internationally to support ESG reporting and actual ESG criteria adoption and adherence.
How Businesses Should Get Ready for Coming ESG Requirements
ESG reporting can be good for companies when done correctly. With more investors interested in sustainable impact investment opportunities or ESG criteria, companies that report accurately and demonstrate eco-friendly, socially conscious processes and strong governance can increase values. However, it’s not enough to have environmental integrity or buy into corporate responsibility. Here are a few things businesses should do to get ready for coming ESG requirements:
- Honestly review ESG status.
- Gather and document measurements that demonstrate ESG status.
- Invest in time and experts to keep up with evolving ESG requirements to ensure the business is ready to report as needed when regulations are launched