By: Rob Fisher, Maura Hodge, and Bridget Beals, KPMG

From top companies committing to net-zero emissions targets to national and international bodies crafting standards and regulations, reporting on ESG topics is quickly becoming a norm of doing business in 2023.

With this trend, investors are gaining an unprecedented look into the impact that companies’ operations have on the environment and the impact that the environment has on companies’ operations. And with the latest frameworks incorporating both qualitative and quantitative disclosure guidance, ESG reporting is beginning to look a lot like financial reporting.

However, guidance on financial results is closely monitored and managed. And while financial statement reporting follows standards and incorporates robust controls that result in consistency, accuracy and comparability of data and disclosures, ESG reporting does not yet require that same standard of rigor. As a result, a discrepancy can emerge between what a company claims it is doing and what it is actually doing. While often unintentional, this discrepancy is nevertheless harmful to investors, customers, employees and others who rely on this information when making decisions.

The colloquial term for this phenomenon, particularly as it relates to sustainability, is greenwashing, and it’s far from novel. But newer terms to the vernacular such as “greenhushing” and “greenwishing” are taking hold. Here’s a quick rundown:

Greenwashing is a practice used by businesses to represent themselves as more sustainable than they truly are. Whether it’s providing misleading information regarding a product’s sustainability or labeling a fund as “green” when it is not, greenwashing erodes trust and can have significant repercussions. Importantly, greenwashing is not a static concept – it occurs on a spectrum, ranging from outright deceit to wishful thinking.

Greenhushing refers to a company’s refusal to publicize ESG information. The company may fear pushback from stakeholders who would find its sustainability efforts lacking or from investors who believe ESG undermines returns. On the surface, greenhushing is not overtly dishonest; however, it limits the quantity and quality of publicly available information. Without this transparency, it becomes challenging to analyze corporate climate targets, share best practices on decarbonization and calculate Scope 3 emissions, which by definition require widespread reporting.

Greenwishing, or unintentional greenwashing, describes a practice where a company hopes to meet certain sustainability commitments but simply does not have the wherewithal to do so. Driven by the pressure to set ambitious sustainability goals, companies can find themselves committing to targets that they cannot realistically achieve, perhaps because of financial, technological or organizational constraints. Failing to achieve these targets can undermine trust in these companies and in the broader system.

Regulators crack down on greenwashing

Intentional or not, the consequences for engaging in these behaviors can be severe. Brand reputation, of course, is at stake, as is business opportunity. And both can manifest in a company’s financials, particularly if greenwashing results in a higher cost of capital.

Investors are on high alert, and regulators have proposed rules designed to drive strategic action around ESG, and consequently, raise the standard for ESG reporting. The U.S. Securities and Exchange Commission (SEC), for example, has proposed regulations for the naming of investment funds, which would expand the application of the Names Rule — a policy requiring at least 80% of assets in a fund to reflect its name — and cut down on the use of misleading ESG terminology. And should the SEC climate disclosure rule require ESG disclosures within the financial statements, that information would be subject to audit — another safeguard against faulty reporting. Final rulings on both topics are slated for fall 2023.

Looking abroad, the Sustainable Finance Disclosure Regulation (SFDR) in the European Union is taking steps to improve the transparency and comparability of ESG in financial products such as funds. Through its classification system, a fund can be labeled “standard,” “promoting” or “having the objective of,” enabling investors to better compare funds and analyze the ESG-related impacts of the investment, known as Principal Adverse Impact indicators. While the SFDR directly applies to companies that make financial products available to end customers, its impactis likely to extend to their investees like multinational companies and may trickle down to private markets as well.

In the United Kingdom, the Sustainability Disclosure Requirements is a package of reforms requiring companies to implement the Green Taxonomy and follow recommendations from the Task Force on Climate-related Financial Disclosures and, subject to consultation, the International Sustainability Standards Board. The reforms also include guidance for transition planning and private company disclosures.

These current and proposed requirements only scratch the surface. While the primary focus is certainly on enhancing the quality of ESG reporting, the implicit message about greenwashing – and greenhushing and greenwishing – is clear: As disclosure requirements become more rigorous, the quality of ESG reporting will improve and, in turn, diminish the risk of greenwashing.

Avoiding ESG pitfalls

Despite regulatory guardrails, it is easy to fall victim to greenwashing tendencies. However, there are several steps companies can take to mitigate these risks while still capitalizing on ESG opportunities:

Maintain a robust ESG governance program that starts with clear buy-in from management and the board and embeds ESG considerations into new and existing risk management procedures and controls.

Implement educational programs to upskill the board, management and professionals on the fundamentals of ESG, including related risks and opportunities. There needs to be a deep appreciation for the challenges associated with setting ESG goals and reporting on them effectively, and that starts with education.

Stay abreast of the changing regulatory landscape, understanding that compliance with new and existing rules will help address the risk of improper reporting but require considerable time, energy and resources.

Scenario plan for potential greenwashing risks, recognizing that perceptions around carbon offsets, renewable energy certificates and other emissions reduction tools are evolving. Companies that rely on certain levers to reach targets today could find themselves facing greenwashing accusations tomorrow, regardless of whether they followed the rules. And importantly, it’s not just the “E” of ESG – greenwashing risks lurk among social and governance factors as well.

When in doubt, follow the mantra, “Do what you say, say what you do.” That’s the crux of ESG reporting.

Transparency drives trust and value

Ultimately, people want to do business with and work for companies they trust, and it’s the companies that transparently share the who, what, when, where, why and how of their ESG strategy and reporting program that will earn that trust. After all, even in this evolving regulatory environment, ESG is not just about compliance – it’s about driving value, building a competitive advantage and promoting long-term resilience.

About the authors:

Rob Fisher is ESG Leader at KPMG U.S. Maura Hodge is ESG Audit Leader at KPMG U.S., and Bridget Beals is Partner, Co-Head of Climate Risk and Strategy at KPMG in the U.K.

The post Guest Post – Greenwashing, Greenhushing and Greenwishing: Don’t Fall Victim to These ESG Reporting Traps first appeared on ESG Today.

The post Guest Post – Greenwashing, Greenhushing and Greenwishing: Don’t Fall Victim to These ESG Reporting Traps appeared first on ESG Today.