New regulations may be on the horizon that aim to prevent corporations from greenwashing their data – but will they have a positive effect on ESG investors?
Why is this happening now?
Although there has always been room for misrepresentation, lately, it has become a much more significant concern for investors. The current culture of global uncertainty has increased ESG’s popularity – according to Federated Hermes, Inc., interest in ESG rose by 90% between 2020 and 2021. And that increase is continuing into 2022, with ample opportunity for and a large interest in ESG investment opportunities.
As curiosity about ESG continues to grow, concerns about greenwashing are at an all-time high – a report by Quilter asserts that 44% of ESG investors list “investments not being what they claim to be” as their primary concern. In order to maintain the momentum that ESG investing has gained, regulatory bodies must do their best to stem concerns about greenwashing and guide corporations towards honest reporting of practices through increased regulations.
Is there really a way to regulate these types of issues?
Yes – and regulatory bodies are amping up.
In the United States, ESG regulations are monitored by the ESG Task Force – a division of the Securities and Exchange Commission that was formed to tackle violations and prevent misconduct.
In the EU, regulations are put forth as part of the Sustainable Finance Disclosure Regulation (SFDR), a fairly new effort that was introduced in 2019 and came into effect in 2021 for the purpose of supporting the European Green Deal.
Both have the power to hold corporations accountable – and this is a key step in the prevention of greenwashing.
So, what’s being done?
In an effort to avoid investors being misled by companies who claim their practices are more sustainable than they truly are, both aforementioned regulatory bodies are introducing regulations that will enforce mandatory data disclosures that will, in theory make it more difficult for companies to misrepresent the realities of their business practices and the impacts they have on climate.
The US is in the process of deciding what data will need to be disclosed in order to increase transparency for investors, while the EU has determined 18 data points that will be mandatory for fund managers to disclose by 2023.
Who does this affect?
Investors will be given more information and hopefully gain confidence as the new regulations are designed to increase transparency through mandatory disclosures – this coincides with anticipated growth in ESG investments in 2022.
Conversely, CEOs may have to make changes to their methods of operation if they are to be able to adhere to the new regulations and bring in ESG investors at the same time. It will be more difficult to represent a business and its practices as ESG friendly – and this increased strictness is just what is needed to give investors a better understanding of where their money goes.
There is a real challenge to developing standardized reporting methods. Once implemented organizations will need to adopt new technologies and strategies to track and prove their metrics. This may also have differing effects on small, medium, and large organizations.
That said, as regulations regarding how corporations can represent themselves and their practices come into place, the credibility of ESG investing grows. Ultimately, this may lead to a larger and more secure practice of investing within the ESG movement. The more trust investors have in the choices they’re making, the more likely we are to see bigger and better changes – and that’s the goal.
Reporting by Isabella Murray – McKay