Greenwashing Prevention: CFO Best Practices

In an era where sustainability is a critical business imperative, the latest EY survey highlights a pressing issue for Chief Financial Officers globally: the risk of greenwashing.

Our experience working with Chief Financial Officers and Chief Investment Officers from global investors and companies aligns with the insights from EY’s 2024 Global Corporate Reporting Survey.

?These findings underline the homogenous approach to reporting and frameworks, and the absolute nature of targets that often do not translate or make sense. Many Chief Financial Officers feel overwhelmed by frameworks like CSRD, TNFD, and TCFD.

What we learn from our One-on-One CFO training

In our one-on-one briefings and training sessions, we reassure CFOs that it’s okay to feel out of their depth. Instead of shying away from analysts’ questions on targets and data, CFOs and Chief Investment Officers need to dig in and robustly challenge discrepancies. Now is the time to challenge your sustainability teams, challenge your investor relations teams, challenge your communications teams and the analysts' asking questions. Failure to do so means the buck stops with the CFO who holds the sign off and the responsibility.

Key Findings from the EY Survey

• Greenwashing Concerns: Over half of CFOs worry about greenwashing risks in sustainability reporting.
• Data Integrity Issues: Nearly all finance leaders report problems with the integrity of nonfinancial data.
• Investor Pressure: 69% of finance leaders say investors are increasingly focused on nonfinancial value drivers, especially sustainability.
• Sustainability Analysts: 43% of investors now employ full-time sustainability analysts, with 25% expecting this number to grow significantly in the next two years.
• Credibility Issues: 55% of finance leaders believe their industry’s sustainability reporting lacks credibility and risks being perceived as greenwashing.

The Greenwashing Conundrum

Over half of CFOs express significant concerns about greenwashing risks in their sustainability reporting and are unsure how to manage. This fear is not unfounded. Many CFOs must sign off on data they do not fully understand. As companies strive to meet growing demands for transparency from regulators and investors, the integrity of nonfinancial data becomes paramount. Yet nearly all finance leaders report issues with data quality, casting doubt on the credibility of their sustainability claims. The pressure to ‘do good’ or make a ‘positive PR announcement’ can override the practical reality that reducing carbon and climate impacts from a supply chain or operation is complex, costly, and time-consuming.

Investor Scrutiny Intensifies

The survey highlights a notable shift in investor behaviour, with increased scrutiny of CFOs’ responses to key regulations and emerging themes. More than two-thirds of Chief Financial Officers have observed an increase in investor inquiries about nonfinancial value drivers, with sustainability taking centre stage. This trend is corroborated by the fact that 43% of investors now employ full-time sustainability analysts, and a quarter anticipate a significant increase in such roles over the next two years. Investors are not just passively interested in sustainability; they are actively scrutinising it which requires CFOS to take a more strategic approach to how they engage with their investors and analysts.

Analysts Are Also Learning

We work with analysts during the pre-reporting season, walking them through reports from companies in their portfolios and explaining different frameworks, compliance, and regulatory challenges. Many analysts want to ask challenging questions to CFOs but are new to this field and often lack hands-on operational experience. Without this ‘in the trenches’ approach, many analysts deal with theoretical aspects and are too distant from the businesses they assess to make accurate evaluations of what ‘good’ looks like and how it will impact short and long-term value creation.

Data Integrity: A Persistent Challenge

Despite the heightened focus on sustainability, the survey reveals significant data issues. An incredible 96% of finance leaders acknowledge problems with the nonfinancial data they receive for reporting purposes. Issues range from varying data formats to inconsistencies, undermining the reliability of sustainability reports. Consequently, 55% of finance leaders believe their industry’s sustainability reporting lacks credibility and risks being perceived as greenwashing.

ESG Ratings as an Example of Poor Data

When we audit reports and claims using our carbon stream mapping approach, we regularly find errors and anomalies. The collapse of the Green Bond market based on ESG ratings shows how data scraped from outside a company or portfolio does not indicate progress in sustainability, carbon, and climate. To meet their fiduciary duty, we advise CFOs and Chief Investment Officers to push back, run robust audits like the carbon stream map, and not settle for or publish data they don’t trust to avoid greenwashing.

Real-World Examples of Greenwashing

To understand the gravity of greenwashing, consider these cases that have cost companies financially and tarnished their reputations:

1. McDonald’s Paper Straws: Introduced as an eco-friendly alternative, these straws were later found to be non-recyclable.
2. Coca-Cola Life: Marketed as a healthier option with green packaging, it still contained significant amounts of sugar.
3. H&M’s Conscious Collection: Despite claims of sustainability, investigations revealed that most of their sustainability assertions were misleading.
4. Volkswagen’s Diesel gate: The infamous scandal where Volkswagen marketed diesel cars as low emission, only to be caught cheating emissions tests.
5. Keurig’s Recycling Claims: Promoted as recyclable, most recycling facilities did not accept their coffee pods.
6. IKEA’s Illegal Logging: Despite claims of sustainable sourcing, IKEA was found using illegally sourced wood.

These examples underscore the importance of genuine sustainability efforts and the need for robust, verifiable data to back up environmental claims. Chief Financial Officers must push back on data and reports from their sustainability teams to get it right.

Implications of Greenwashing in Sustainability Reporting

Greenwashing can have significant and far-reaching implications for companies:

1. Reputational Damage: Greenwashing can severely damage a company’s reputation, eroding trust and leading to a decline in customer loyalty, negative media coverage, and a tarnished brand image unless they start to be proactive and manage the investor relations and communications challenges.
2. Regulatory and Legal Risks: Governments and regulatory bodies are increasingly cracking down on greenwashing. Companies found guilty of making false environmental claims can face hefty fines, legal action, and stricter regulatory scrutiny.
3. Financial Consequences: Beyond fines and legal fees, companies may experience a drop in stock prices, loss of market share, and increased costs associated with rebranding and marketing to repair their image.
4. Operational Disruptions: Greenwashing can lead to operational disruptions, such as product recalls or bans, resulting in significant financial losses and logistical challenges.
5. Loss of Competitive Advantage: Genuine environmental efforts can provide a competitive edge. Companies caught greenwashing may lose this advantage as consumers and investors shift their support to more transparent and genuinely sustainable competitors.
6. Increased Scrutiny and Pressure: Once accused of greenwashing, companies often face heightened scrutiny from regulators, NGOs, and the public, forcing them to invest more in compliance, transparency, and genuine sustainability initiatives.

Key Steps for CFOs to Avoid Greenwashing

Although it might sound lonely, the fact is the onus today is on Chief Financial Officers to step up and take responsibility to reduce the compliance and financial risks they face in ESG reporting.

1. Understand and Define Sustainability Goals: Clearly define what sustainability means for your organisation. Align these goals with your company’s overall strategy and ensure they are realistic and achievable.
2. Ensure Data Integrity: Implement robust data collection and verification processes. Ensure that all nonfinancial data is accurate, consistent, and reliable. Regular audits can help maintain data integrity.
3. Transparent Reporting: Be transparent about your sustainability efforts, including both successes and areas needing improvement. Avoid exaggerating claims and provide evidence to back up your statements.
4. Engage with Stakeholders: Regularly communicate with investors, customers, employees, and other stakeholders. Listen to their concerns and incorporate their feedback into your sustainability strategies.
5. Educate and Train: Provide training for your finance team on sustainability reporting standards and frameworks. Ensure they understand the importance of accurate and honest reporting.
6. Collaborate with Experts: Work with sustainability experts and third-party auditors to validate your sustainability claims. This adds credibility to your reports and helps identify areas for improvement.
7. Set Measurable Goals: Use the Carbon Stream Map to establish clear, measurable sustainability targets. Track progress regularly and adjust strategies as needed to meet these goals.
8. Avoid Overstating Achievements: Be cautious about making bold claims that cannot be substantiated. Focus on genuine achievements and incremental progress.
9. Regular Reviews and Updates: Continuously review and update your sustainability practices and reporting processes. Stay informed about new regulations and best practices in sustainability reporting.
10. Promote Accountability: Foster a culture of accountability within your organisation. Ensure that everyone, from top management to operational staff, understands their role in achieving sustainability goals.

By following these steps, Chief Financial Officers can build trust with stakeholders, enhance their company’s reputation, and ensure that their sustainability efforts are both credible and impactful.

What CFOs Need to Consider

The implications of greenwashing are profound and multifaceted. Companies must prioritise a robust approach to data gathering, auditing, and ensuring clear and concise communication between the CFO and other departments to avoid these risks. By doing so, they can build trust, enhance their reputation, and secure long-term success in an increasingly eco-conscious market.

The EY survey serves as a wake-up call for Chief financial Officers and leaders to enhance the credibility of their sustainability reports and avoid the pitfalls of greenwashing which impact the bottom line. This is now becoming part of your job mandate and responsibility, so it’s better to delve into the details and understand the practical steps you can take.

Only through transparent challenging of the accuracy of reporting can Chief Financial Officers build trust within their team, investors, and stakeholders, ensuring that their carbon and climate initiatives are impactful, credible, and costed.

More about Martello

At Martello, we support companies and investors in refining their strategy, enhancing communications, and navigating capital markets and investor relations successfully. Our unique Carbon Stream Mapping approach simplifies the accurate and quick measurement of your carbon emissions.

We identify and measure all critical activities contributing to your carbon footprint (Scope 1, 2 & 3) across your business and its supply chain. Our advisory services and delivery-focused approach support your organization in managing operational and compliance risks. We ensure your business thrives and grows, regardless of the challenges.

How Martello Can Support with Strategic Communications

At Martello, we are delivery focused and employ a range of strategies to help companies avoid greenwashing and ensure their sustainability efforts are genuine and impactful. Here are some specific approaches we use:

1. Strategic Communications: We develop and implement strategic communication plans that align with a company's sustainability goals. This includes crafting clear and consistent messages that accurately reflect the company's sustainability efforts and achievements.
2. Carbon Stream Mapping: Our unique Carbon Stream Mapping approach simplifies the accurate and quick measurement of carbon emissions. We identify and measure all critical activities contributing to a company's carbon footprint (Scope 1, 2 & 3) across their business and supply chain. This helps companies set realistic and achievable carbon reduction targets.
3. Materiality Assessment: We assist companies in conducting materiality assessments to identify the most relevant sustainability issues for their business and stakeholders. This ensures that companies focus on areas that have the greatest impact and are most important to their stakeholders.
4. Transparency and Accountability: We encourage companies to be transparent about their sustainability initiatives by providing comprehensive disclosures. This includes both positive achievements and areas needing improvement. Transparency builds trust with stakeholders and reduces the risk of greenwashing accusations.
5. Stakeholder Engagement: Regular communication with investors, customers, employees, and other stakeholders is crucial. We help companies engage with their stakeholders to build trust and accountability. This involves listening to stakeholder concerns and incorporating their feedback into sustainability strategies.
6. Continuous Improvement: We support companies in establishing processes for continuous improvement in their sustainability practices. This involves setting measurable goals, tracking progress, and making necessary adjustments to achieve long-term sustainability objectives.?

If you are a Chief Financial Officer and would like to discuss any of the points and issues raised in more detail lets talk !

To find out more about Martello, our work and how we can help visit our website.

https://www.martello.global/