ESG -IFRS - Regulation and Greenwashing

Since last year, ESG has been becoming a trending topic, and even IFRS Foundation and Value Reporting Foundation will prepare a new set of rules for ESG disclosures.?

This is excellent news, at least for my understanding, because it will extend a general practice, and IFRS is increasing its scope.

Also, Public companies are working through the potential implications of the recent Securities and Exchange Commission (SEC) proposal on climate-related disclosures by publicly traded companies that, if adopted as proposed, would require additional disclosures both outside the audited financial statements and inside the audited financial statements. In other words, more work to do and more resources, more systems, and more effort.

?But there are a couple of things that are still missing here for me:

1. Greenwashing.
2. ESG is more than environmental disclosures, Social and Corporate Governance is part of ESG.

On this occasion, I would like to refer to the first one.

Greenwashing:

Greenwashing is the process of conveying a false impression or providing misleading information about how a company's products are more environmentally sound. Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company's products are environmentally friendly.

For example, companies involved in greenwashing behavior might make claims that their products are from?recycled materials?or have energy-saving benefits. Although some of the environmental claims might be partly true, companies engaged in greenwashing typically exaggerate their claims or the benefits in an attempt to mislead consumers.

There are many discussions around ESG, but for me, there will not be an effective new ESG transition and reporting until Regulations be very clear about what could consider as Greenwashing, and when companies are under this category, this should be communicated to the Financial Statements readers.

Nevertheless, this is very hard to do because there are 2 types of companies, those ones that have an intention to cause this false impression and those companies that really have the intention to have a change but use wrong information, in the end, is not impacting the climate change in a positive way that they are disclosure.

In the USA, for example, The U.S. Federal Trade Commission (FTC) helps to protect consumers by enforcing laws designed to ensure a competitive, fair marketplace. The FTC offers guidelines on how to differentiate real green from greenwashed:

• Packaging and advertising should explain the product's green claims in plain language and readable type in close proximity to the claim.
• An environmental marketing claim should specify whether it refers to the product, the packaging, or just a portion of the product or package.
• A product's marketing claim should not overstate, directly or by implication, an environmental attribute or benefit.
• If a product claims a benefit compared to the competition, the claim should be substantiated.

But, this is not enough, because nowadays the topics are very complex and have many particularities.

Harvard Law School issued the ESG Global Study 2022, and there is a section for greenwashing; it says

?¨While global investors think greenwashing is now less pervasive, they consider it a bigger adoption barrier than last year. They are also slightly more worried about its potential to trigger a mis-selling scandal (52% vs. 48% in 2021). Concern over a mis-selling scandal has increased most sharply among North American respondents (49% vs. 36% in 2021)¨

?As the ESG megatrend continues to gain steam and become more mainstream, regulation is playing an ever-increasing, with this figure rising to 48% of Asian-Pacific investors. The same percentage of global investors (42%) think setting minimum regulatory standards for investment products and services would help tackle greenwashing.

But while the regulatory framework is helping in the fight against greenwashing, investors think fund managers are best placed to tackle the issue. Global Investors point to increasing the transparency on how fund managers invest as the most effective way of combating greenwashing (54% vs. 47% in 2021). This is closely followed by increasing the quality and transparency of fund reporting in terms of detailing ESG investments and how they will be monitored (52% vs. 55% in 2021).

But my question is. how will funds ensure the quality and transparency of fund reporting if there are no clear rules or guidelines related to what should be considered as greenwashing and what not?

For a fund, something could be classified as greenwashing, but for another one, greenwashing No. It is clear through the consolidation of the Value Reporting Foundation, home to the Integrated Reporting Framework and SASB Standards, into the IFRS Foundation, the Financial Reporting process will be something very clear, and the KPIs will be something that sooner or later, companies will be standardized by type of business; however, this any relationship has with the meaning of greenwashing and the consideration to evaluate if something could be called a real next step to be more sustainability or just appeared.

In general, we are seeing very good advances in ESG; however, Costs associated with the implementation of the regulations and greenwashing are aspects to consider in the future, in my personal view.

JP Calderon