Teresa Ko is a trustee of the IFRS Foundation, and a former chair of the Hong Kong Stock Exchange's Listing Committee. She is senior partner of Freshfields Bruckhaus Deringer's Hong Kong office.
When American environmentalist Jay Westerveld coined the term "greenwashing" in the 1980s, he was calling out the false virtue of hotel chains urging guests to reuse their towels in the name of helping the planet when the real objective was cutting their laundry bill.
As concerns over climate change escalate to a new level, greenwashing is on the rise, especially those practices aimed at giving investors "a false impression about how well an investment is aligned with its sustainability goals."
According to a recent survey by Refinitiv, a global provider of financial market data, around 60% of 250 institutional investors polled with over $10 trillion under management believe companies mislead when it comes to their environmental credentials. And 84% think the practice is becoming more common.
Among those being criticized for greenwashing are some of the world's largest banks, including one reported to have financed around $75 billion worth of fracking and other oil and gas exploration since the Paris Agreement.
Even the U.N. Principles for Responsible Investment, the world's leading proponent of responsible investment, with over 3,100 signatories, made climate risk indicators mandatory in 2018 to address greenwashing and removed 14 signatories recently for failing to participate in its annual assessment.
Greenwashing has been further exacerbated by increased consumer demand for products that claim to respect nature. This seems to be a never-ending downward spiral.
Over the last decade, there have been a number of initiatives aimed at enhancing disclosure related to sustainability reporting, especially related to climate change risks. But with up to 1,700 different metrics now available for companies including some more established ones such as the Task Force on Climate-Related Financial Disclosures, Sustainability Accounting Standards Board, or SASB, and the Global Reporting Initiative, or GRI, the sustainability reporting landscape looks increasingly chaotic, inefficient and ineffective.
In June 2020, the European Parliament formally adopted the EU's Sustainability Taxonomy Regulation, which has been hailed as "the most progressive piece of financial legislation in the world" to reduce greenwashing and help investors and companies make informed investment decisions when it comes to environmentally sustainable economic activities. Unfortunately, it is unlikely to provide a solution to problems outside the EU.
One 2019 report by McKinsey & Company noted that investors and executives identified the "inconsistency, incomparability and lack of alignment of standards" as the biggest challenge of sustainability reporting. And earlier this year the International Organization of Securities Commissions, or IOSCO, noted that a majority of market participants believed regulators should do more to deter greenwashing.
So, how can we achieve more effective sustainability reporting around the world? While there is no doubt that global regulators can do more to combat the ills of greenwashing with more powerful enforcement tools, one private-public model to tackle climate related risks offers a potential solution.
On Sept. 30, the trustees of the International Financial Reporting Standards Foundation published a consultation paper assessing demand for a global set of internationally-recognised sustainability standards.
Among the options outlined was the establishment of a new Sustainability Standards Board to work alongside the existing International Accounting Standards Board, which sets the IFRS's own standards, under the same three-tier governance structure of the IFRS Foundation. This new board would initially focus on climate related risks as these are the most urgent.
The new board would not compete with existing regional or national initiatives but would work to help harmonize, standardize and consolidate the many metrics and disclosure requirements that exist today. It has been heartening to see key groups such as International Integrated Reporting Council, CDP, Climate Disclosure Standards Board, or CDSB, GRI and SASB expressing commitment to work closely with IOSCO and IFRS Foundation.
Clearly, the new board must seek to build effective synergies with existing financial reporting frameworks. Financial reporting and sustainability reporting frameworks should be developed in parallel, and not at the expense of, each other. These frameworks should also include a high degree of correlation and connectivity with each other.
In view of the existential threat posed by climate change, the financial impact of climate related risks may need to be reflected in financial statements in order for them to be meaningful to investors and the public. As former U.S. Federal Reserve chair Janet Yellen has said, climate change risks have not been "priced in yet."
Global data and information that can be easily compared and audited are mission critical if we are to have a real understanding of the true cost to companies, and our investments in them, of climate related risks. Establishing a new Sustainability Standards Board will also be subject to adequate funding and appropriate technical expertise being made available.
Over the last 20 years, the IFRS Foundation has transformed the global financial reporting landscape, and today over 140 jurisdictions require the use of IFRS Standards by all or most publicly-listed companies. The new consultation paper invites stakeholders to provide detailed comments including whether to have a focused definition of climate-related risk or a broader consideration of environmental factors. The consultation period ends on Dec. 31.
We now have another opportunity to shape the way in which disclosure on climate related risks can be conducted on a global basis.
Given the urgency and importance of climate-related risks, and their effect on reporting entities and the communities in which they operate around the globe, we must seize the opportunity to act. Our world can no longer afford to tolerate greenwashing and those involved in it must be called out.