False or inaccurate: will the CSRD end greenwashing?
Since the European Parliament’s landslide vote in favour of the Corporate Sustainability Reporting Directive (CSRD) on 10th November 2022, nearly 50,000 firms across the EU and beyond are now facing up to the realities of the mandate. They are working towards ensuring that they’re able to deliver credible, trusted ESG reports.
One major hope is that this will address a hot-button issue companies around the world are increasingly having to contend with: greenwashing.
In the words of French economy minister Bruno Le Maire, the impact of these upcoming changes will be clear: “Greenwashing is over.” But, digging deeper, what does this mean—and is it truly the case?
How does greenwashing happen?
It can be easy to dismiss greenwashing as a deliberate act of deception—in reality, it’s much more complex.
Greenwashing issues tend to arise in two main areas: misleading marketing strategies and inaccurate reporting.
In the first instance, this might arise when an organisation changes the colour of their packaging, uses nature-related imagery to attract more sales, or heavily promotes their environmental initiatives while failing to address the wider impact of their business activities. In the second, this will normally involve a company providing incorrect numbers or incomplete information to investors, leading the investors to make binding financial decisions based on inaccurate data.
Crucially, both of these issues can just as easily occur by mistake as by design.
Marketing departments who are tasked with external communications while being disconnected from daily operations run the risk of inadvertently portraying the company in an overly favourable light; overstretched and overburdened reporting teams, meanwhile, can easily make mistakes when gathering or managing data if they are working with manual and disconnected reporting processes.
Greenwashing carries real risk
Disconnected processes that cause unintentional greenwashing carry real-world risk. Here’s one example:
- A company provides incomplete information within their ESG report
- Asset managers might then incorrectly include them in their Article 9 fund (the Sustainable Finance Disclosure Regulation (SFDR)’s highest category of environmentally-focused financial products)
- If disclosed information, included in the Article 9 fund, is later found to be inaccurate, the fund’s reputation—and the credibility of all their other funds—are at serious risk
As rules surrounding fund classification become increasingly scrutinised, fears of potential damages snowballing in this manner have led to major asset managers like Amundi pre-emptively reclassifying their Article 9 funds to the less strict Article 8 category.
As demands for greater transparency intensify and new requirements—such as those being brought in by the CSRD—come into play, companies are having to move fast. They will now be rethinking every element of their ESG reporting strategy, from data collection (in the UK, the Financial Conduct Authority has formed a group to develop a Code of Conduct for ESG data and ratings providers that will further impact organisations within the region) to outward communication.
How will the CSRD mitigate greenwashing risk?
The CSRD is bringing in a number of major changes that will have a direct impact on greenwashing practices—particularly those relating to the disclosures provided to stakeholders in annual reports. These changes are:
- A set framework for everyone to follow (the European sustainability reporting standards, or ESRS), requiring companies to report on their ESG metrics in the same way as their competitors
- Significantly more detailed requirements, calling for a quantitative approach (in conjunction with EU Taxonomy disclosures) and leaving less room for individual interpretation
- A focus on double materiality, requiring companies to consider their impact on the environment and the environmental risks faced by the business in an equally rigorous and balanced manner
- Mandatory external assurance, rolled out with a phased approach that first focuses on limited assurance and then reasonable assurance, that will require companies to have all their ESG data audited and treated with the same level of suspicion as financial data
By introducing a single framework for everyone to follow, the CSRD will bring greater comparability to ESG reporting. This will benefit investors who will be able to compare, contrast and catch outliers much easier than before. And it will be welcomed by analysts who will be able to clearly discern how different organisations are tackling the same ESG concerns and use those insights to make well-founded recommendations.
The recently approved updated versions of the ESRS leave little room for ambiguity, with each requirement linking to a specific law and/or framework to be followed. Though these requirements have not been created in a vacuum (and many are based on, or taken from, existing frameworks), this provides a new level of detail and granularity that companies will need to follow.
Perhaps most significantly of all, external auditing rules will bring in an unprecedented degree of assurance and trust for investors—a requirement that has, until now, only been in place in three EU countries.
But while the promise of external assurance may be of comfort to financial institutions, who will no longer need to blindly trust the numbers disclosed to them by companies, businesses now face the serious task of preparing for these tighter requirements in order to maintain their ESG status.
How to prevent unintentional greenwashing
Build a robust, integrated reporting process
To prepare for the stricter CSRD requirements and avoid potential issues surrounding greenwashing, companies need to start thinking seriously about how they process and manage their ESG information. As the EU puts ESG on the same level as financial data, business leaders face the task of bringing their financial and non-financial processes in line with one another, ensuring that all of their information—from numbers to qualitative statements—is traceable, audit-ready and follows a clear procedure.
Eliminate silos between disparate teams
Team structure and workload must also be a key consideration. As regulations pile up, the gathering, management and communication of ESG data cannot be treated as “side of desk” work, as overburdened teams are more prone to human error and miscommunications. Scrutinising every step of existing processes, while investing in the right software and tools for the gathering and processing of information, can help build a robust workflow with the ability to adapt to evolving requirements.
Invest in ESG expertise
Beyond structural changes and the adoption of appropriate tools, companies must also consider investing in the right people. ESG disclosure requirements are getting more complex which, in turn, will increase the risk of greenwashing. It will therefore be necessary to have experts on hand who have the relevant in-depth knowledge and breadth of understanding, and who are able to advise reporting teams accordingly.
Establish open channels of communication across the business
Finally, business leaders need to ensure that clear communication on ESG issues is prioritised across the organisation. Making sure that siloed communication and marketing teams aren’t at risk of making claims that undermine carefully considered reporting frameworks is an essential step in protecting the business against greenwashing claims. Rather than being solely focused on casting the company in a favourable light, external communications must also show an understanding of ESG disclosure frameworks and prioritise transparency, taking the full picture into account in their messaging.
So, will the CSRD truly be the end of greenwashing?
In short, the answer here is both ‘yes’ and ‘no’.
As rules surrounding greenwashing become increasingly strict, expectations for the credibility of sustainability information are being raised. At the same time, so too are the consequences for organisations that fall short.
By bringing environmental data in line with financial information while requiring external assurance, the CSRD is simply clamping down on companies that (inadvertently or otherwise) overstate their credentials. In turn, companies will need to step up to the challenge in order to pass this additional layer of scrutiny—particularly if they wish to secure or maintain a certain perception, classification or level of funding.
Honest mistakes and deliberate attempts to side-step rules will almost certainly always exist. But the CSRD will make it considerably more difficult for such occurrences to slip through the net. As the risks become greater, companies are taking action to establish trust and ensure transparency at every level.