The Role of Stakeholders to Minimise Greenwashing

Investors have a key role to play in calling out greenwashing and poor ESG practices by dis-investing in companies that engage in them or using debt or equity denial as a tactic to force corrective behaviour.

Voluntary guidance and making sure issuers know what the expectations are in the terms of net zero alignment is not enough. ESG investors are under huge pressure to align their portfolios to net zero. To do that and avoid greenwashing themselves, investors need firm assurances that the capital they allocate to ESG delivers on claims.

Governments and regulators must take a stand against greenwashing in the consumer, business, professional, and institutional sectors by enacting official legislation and enforcing penalties for non-compliance. Greenwashing must be formally captured in law under headings of predatory, aggressive, misleading, or deceptive conduct and behaviour.

ESG investing cannot be reduced to a box-ticking activity. When asked, many investors admit that they are skeptical of green bonds' ability to deliver on their promises. That is inexcusable.

The Australian Consumer Law, for example, bans people in trade and commerce from engaging in unfair, misleading, deceptive and unconscionable conduct. Under the ACL, false advertising, misrepresentation, and withholding key information are all classed as conduct that is misleading or deceptive. The burden of proof is on claimants to prove that they relied on misleading or deceptive conduct to their detriment.

Consumer protection regulations in the EU consider withholding material information that consumers need to make informed decisions, and which causes them to make decisions they would not have made otherwise, to be misleading.

Investors and customers are putting pressure on businesses to enhance their non-financial performance in areas such as social and environmental issues. The European Commission issued guidelines in 2017 to assist corporations in disclosing environmental and social information, and it issued additional rules in 2019 for reporting climate-related data. However, the Commission continues to feel that the information provided by firms is insufficient, that it omits items that stakeholders consider to be relevant, that it is unreliable, and that it is difficult to compare between organisations.

So, on April 21, 2021, the Commission unveiled its proposal for a Corporate Sustainability Reporting Directive, which it hopes will improve the credibility of the green investment market. The Non-Financial Reporting Directive will be tightened and expanded by the CSRD.