More and more investors are putting robust ESG strategies at the forefront of their thinking. The future is moving towards sustainability, and eco-friendliness and customers are willing to pay a premium to work with environmentally sound organisations, or to buy products they think are helping reduce their environmental impact.
Greenwashing is often used as a consumer rights term, but it’s also of strong relevance to finance teams. It’s a nod to the term whitewashing, which is when false information is used to hide something wrong.
So, what is greenwashing?
Greenwashing is when you give a false impression of how sustainable your product/service is. For example, you might swap to plastic-free packaging and shout about this in your marketing. But maybe your product uses palm oil, which greatly contributes to deforestation. Customers who bought your product because they thought it was environmentally friendly would feel cheated by this.
More complex is when accountancy and other finance functions are involved. Many investors actively seek sustainable and green organisations to invest in, whether for ethical reasons or because these sorts of businesses tend to have long termism in mind. Misleading them can leave you open to legal action, in addition to a reputational hit.
This can have a huge impact on your brand. Companies that greenwash often see their stock values drop and their reputations irrevocably harmed when it’s uncovered. Greenwashing can be deliberate, but often it can be done by mistake as well, especially if your governance strategy isn’t up to par.
Do note, ESG reporting covers a range of topics, and isn’t limited just to the environmental impact of a company. However, greenwashing refers pretty much exclusively to environmental impact.
Now you know why greenwashing matters. Let’s investigate some steps you can take to avoid it.
1. Regulatory Landscape
By UK law, any company over a certain size needs to produce a strategic report, where they outline a complete overview of the business, but this seldom covers sustainability reporting.
There are a huge number of regulations out there designed to help organisations keep green, and by adhering to them in good faith, you’ll typically avoid accusations of greenwashing. The most important to consider are two key IFRS regulations, released by the International Sustainability Standards Board (ISSB).
These are:
- IFRS S1
- IFRS S2
Despite looking distinct, it’s best to treat these two regulations as interconnected. S1 is generalist and covers the entirety of financial disclosures required from a sustainability perspective. S2 is more specific, and only talks about climate-related disclosures. These help form a global baseline and can be applied to organisations around the world. They can also be used in conjunction with any accounting requirements.
ESG reporting as a rule, is under a lot more scrutiny after many businesses used it incorrectly (whether out of malice or by accident). Expect there to be more regulations to keep an eye on in the future, as stakeholders demand higher standards and more clarity in what sustainability means.
2. Authentic Sustainability Reporting
Sustainability should always be more than a simple act of box-ticking. There are several ways to ensure you’re using best practices for ensuring transparency and accuracy in sustainability reports, including the use of recognized frameworks and third-party audits.
These frameworks can include the Global Reporting Initiative (GRI), or the Sustainability Accounting Standards Board (SASB) or the Integrated Reporting Framework. Different frameworks will suit different organisations.
Ideally, your reporting should construct a clear narrative that uses a mixture of quantitative and qualitative data. Everything should be contextualised, as this will help anyone understand what is going on.
Nobody truly trusts a report that says, ‘we investigated ourselves and found no wrongdoing.’ Third-party auditors help remove the risk of doubt.
Whatever methodologies and data sources you use, you need to make sure that you disclose them. You can have an entire section dedicated to methodology where you can go over why things have been done in a certain way. This builds trust, as you show clearly how you’ve reached certain conclusions. It means you don’t look like you’re hiding anything.
Finance teams have a huge part to play in this. They have access to data from across the business and can bring things together into a single source of auditable truth, which helps present reliable, reportable data that anyone can understand.
3. Stakeholder Engagement
One of the biggest pitfalls with sustainability reporting is being accidentally misleading. Effective communication with stakeholders about sustainability efforts can prevent misconceptions and build trust.
Once you’ve made your reports, you need to find a way to communicate your findings to your stakeholders. This covers both internal and external stakeholders.
Try to avoid spinning your reports too much. If a number isn’t where you want to be, it’s better to own up to this than to try and insist it’s good. That sort of behaviour rings as inauthentic and will show investors you have something to hide.
This is also a good opportunity to lay out where you’re going to make improvements. For example, your company offices might be carbon neutral, but if none of your suppliers are, you can set out your plans to look for other net zero businesses. You do have to action these plans where you can, they’re not a sticking plaster, but this can help take the sting out.
Final Thoughts
Whether you want an enhanced corporate reputation, greater levels of trust among your stakeholders, or a truly sustainable plan that aids the long-term health of your business, avoiding greenwashing is in your best interest.
If you want to learn more about ESG reporting, how it protects you from greenwashing, and how it ties into your finance function take a closer look at Finance from MHR.