The proliferation of corporate decarbonization plans and sustainability initiatives has now reached an impressive crescendo. But regrettably, the same can also be said of greenwashing, which is when a business presents itself as environmentally friendly in an attempt to obscure its past or current practices that are harmful to the environment.
Oil giant Chevron is a case in point. Unconvinced by the company’s clean-energy claims, NGOs have filed a complaint with the Federal Trade Commission, accusing the firm of “egregiously misleading consumers.”
Unsurprisingly, Chevron is not the only company agitating to display its newly found environmental, social, and corporate governance (ESG) credentials in a global economy that’s transitioning to a net-zero future. But the case raises important questions about what counts as credible environmentally friendly activity versus pure PR bluster.
Fortunately, standard setters are holding this issue up to the magnifying glass. Provided they can win the support of large institutional investors and the private sector, they could end up becoming the ultimate climate saviors.
The European Union is already showing strong leadership and is working to produce the world’s first rulebook classifying sustainable economic activity. The EU says this rulebook will help to implement the European Green Deal, a plan to modernize and grow Europe’s economy through sustainable business practices. The rulebook, commonly referred to as the EU taxonomy, will establish science-based criteria on what should count as truly sustainable economic activity.
Encouragingly, the EU is not alone in wanting to accelerate progress, as international efforts are also underway to establish a robust legal framework to expose superficial ESG claims and reward serious action. The world will not meet the UN Sustainable Development Goals (SDG) or Paris Agreement without this new regulatory architecture, so political and business leaders should lend their support.
Most significantly, the International Financial Reporting Standards (IFRS) Foundation has proposed a new sustainability standards board with a mandate to “drive international consistency of sustainability-related disclosures.” If all goes to plan, it should be launched in time for the crucial COP26 climate conference in November.
Central to making progress is elevating ESG reporting to the same level as financial reporting. Establishing robust metrics and disclosures to assess the impact of business on key sustainability issues would make a tremendous contribution in helping to protect both our people and planet.
So far, corporate ESG data has been lacking in quality, consistency, and comparability, which makes it difficult for asset managers to determine where to direct investments. Creating baseline social and environmental standards would help to unblock a vital pool of liquidity that is ready to back companies focused on long-term value creation. In the process, it would also help to underpin a genuine green recovery from COVID-19.
Shifting from voluntary to mandatory disclosures is also an imperative, not only as a means of improving peer competition in a race to the top, but also in improving board and executive accountability. There’s no escaping that the current ESG qualifications of most directors and executives is derisory, and mandatory disclosures would provide the stick to increase competency. The carrot is the promise of higher-performing businesses, increased investment from asset managers, and—top of any company’s wish list—greater customer loyalty.
Most important of all, we must work toward global standardization, since the rewards of regulatory alignment grow exponentially as more stakeholders subscribe to the same terms of engagement. The wider debate over whether hydrogen and natural gas should be labeled “green” is emblematic of why such common understandings are essential. Furthermore, we shouldn’t expect companies to shoulder the burden of different reporting requirements across multiple jurisdictions.
We don’t have any time to lose in building a more sustainable, inclusive, and equitable world economy. We can’t forget that we failed to do so miserably in the aftermath of the 2008 financial crisis, when short-termism and shareholder primacy quickly reestablished their pervasive influence.
But even the most cynical would have to confess the omens are much better this time. Over 1,500 large companies now have decarbonization plans and, according to a Bloomberg Intelligence analysis, “global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management.”
There’s no question that these numbers can be improved on, but the only way to know if we’re truly doing so is by measuring our progress. That’s why supporting the IFRS Foundation’s new sustainability standards board must be a top political, business, and investor priority.
Paul Polman is the former CEO of Unilever and cofounder and chair of IMAGINE, a social venture accelerating business leadership to achieve the SDGs. He is also an ambassador of the World Benchmarking Alliance, a global nonprofit working to develop free, publicly available benchmarks ranking companies on their SDG performance.
