Greenwashing: a risk Boards can’t ignore
29 October 2020 - By Marjella Lecourt-Alma, CEO
Mainstream media is abuzz with features on “how to spot if a company is greenwashing.” And it’s not just the media that’s looking for double standards on climate-related disclosures. Investors and regulators are taking action, demanding that companies more adequately address the financial risks associated with climate change. Corporate leaders, including Board members, need to step it up. It’s a risk that they can’t ignore.
In our recent webinar "Greenwashing: a risk Boards can’t ignore", diverse experts from DLA Piper, The Conference Board, Novartis and Datamaran interrogated the dangers and truths about greenwashing, including a financial crisis. Looking at the events of 2020, in particular, the discussion focused on what learnings businesses could apply to other systemic risks like climate change.
They acknowledged that environmental, social and corporate governance (ESG) issues are not separate; they’re very much interconnected and the Covid-19 crisis has brought that to light. Considering the complexity of the challenges ahead, they reinforced that it all comes down to corporate authenticity.
What do we mean by authenticity? It’s a big concept that we can break down into two main themes: (1) transparency and data, and (2) corporate strategy and Board oversight.
It all comes down to transparency. It has to come down to details and facts, and you have to show not just aspiration, but what you've done.
James Goudreau - Head of Climate, Novartis.
Transparency and data: lifting the kimono on corporate disclosure
When it comes to transparency, we see that the number of companies addressing climate change in their financial filings over the past few years has increased. Two thirds of the S&P 500 reported on climate change risks in their 10-K filings in 2020, as reported in the Financial Times featuring Datamaran insights. This means that one third of the S&P 500 companies are still silent on their regulatory filings.
What’s more, when we dive deeper into the data using Datamaran’s patented technology, we see that the majority of these disclosures are quite generic. As Datamaran’s Director of Product Ian van der Vlugt explains, this begs the question - are these disclosures nothing more than greenwashing or lip-service?
"There’s been an increase in disclosure of climate-related issues, but when it comes to disclosure of specific risks associated with climate change, that’s where we see quite a bit of information missing. That’s when you start to think, what’s going on here? Are we just being reactive to requests for disclosure of data? Or are we fully integrating these risks into our operations and our strategy?”
Thomas Singer - Principal Researcher, The Conference Board
"This conclusion stems from analyzing disclosure, but since reporting is a vehicle to communicate about the implementation of strategy, it indicates a lack of sound internal processes to tackle some of the biggest risks of any of our lifetimes. Or a general lack of understanding about the value of reporting. The only way that these processes can improve is by having the right information to guide decision-making, with technology being a key enabler.”
Ian van der Vlugt- Director of Product, Datamaran
This can be attributed to a variety of factors. For some, it may be due to a lack of expertise in-house. For others, it may be a fear of litigation. For many, it’s likely a disconnect between how this risk is viewed in relation to the core business strategy. It’s often disconnected from key business processes, including risk management, annual reporting and Board oversight.
Corporate strategy & Board oversight: walk the talk
Companies that integrate climate and ESG issues into their discussion of strategy are likely more prepared and willing to disclose information in their financial and regulatory filings. But the others, those who continue to view these types of issues as isolated risks, aren’t ready to do so.
How can you get ready? The first step is to scan the external landscape and widen your view of current, potential and emerging risks and opportunities. Traditionally, companies focus on issues that are top-of-mind for Board members, investors or mandated within regulatory requirements. But that’s short-sighted.
The first question to ask is, what are the material aspects of that universe to our business? And the answer is not going to be the same for any two businesses. It will be as different as a fingerprint is. Once you've worked out what that materiality matrix looks like, then you invest in that matrix. And that is what the statistics show will result in enhanced profitability for businesses.
Alex Tamlyn - Partner & Head of Capital Markets EMEA, DLA Piper
The shift we see now is moving away from businesses focusing on short-term profitability to concentrating on trust and reputation as a balance sheet item, to doing business authentically.
This is where we see some boards and CEOs struggling, especially those taking the view that the basic principles of business haven’t changed for 200 years. To reconcile with the fact that the risk landscape is changing more rapidly than ever, and that a wider scope of stakeholders influence your business viability, can be a big ask.
The ship has sailed: take control of external risks
Nevertheless, it is very hard for anybody, even the most battle hardened CEO to be able to say that the inclusion of climate-related issues is simply a ‘nice to have’ component of risk management and corporate governance strategies in the current climate. The data proves this.
The knock on impacts of climate change are already having severe impacts on businesses. From severe weather causing disruptions to supply chains and distribution channels, to the loss of credibility and financial damage.
- Understand & know your footprint
- Set a goal to reduce it
- Measure & perform to that goal
- Be transparent about it
These components apply to all types of external risks - from Diversity, equity and inclusion to public health. Things are accelerating as regulatory developments take shape, millennials become your employers and main customers, investors put their capital to work, and mainstream media actively writes more and more (I go more into why ESG is the hottest ticket in town in this recent LinkedIn post).
As more external factors determine the future of business, companies need to take control and gain a more clear view. Ultimately, it’s about ensuring consistency in how you approach risk management, expanding this to include strategic, external and emerging risks; how you report information on these both internally and externally; and how you ensure Board and C-level buy-in throughout the process. That’s where data and technology plays a critical role.
“What do you have to do to develop a program that can deliver in the most challenging framework that you have? Because then you can deliver it everywhere else without any change in process. The more you can do to have a single process to come up with your assessed risks and exposures, the more you can flow through normal processes.”
James Goudreau - Head of Climate, Novartis
We have to go back to educating. Educating corporate directors, so they’re equipped to ask the right questions; educating C-suite so they can understand what to do and “how to be transformative;” and educating scientists so they can solve the real problems and create the real opportunities.
As echoed by our experts, the first step is to know what your material external risks and opportunities are. This needs to be a data-driven and dynamic process that informs and strengthens risk management, annual reporting and Board oversight. The events of 2020 have made crystal clear that what’s financially immaterial today may be material tomorrow.
Companies need to, as our client and Hexion CEO Craig Rogerson says, systematically monitor their success against these external risks and opportunities. For the past six years, our global community of clients have achieved this by using Datamaran’s patented technology.
There’s no denying that the new age of materiality and risk management is here. As your investors and regulators watch more closely for “ESG-washing” - from double standards on diversity and inclusion to climate change - we’re ready to help you take control and gain a more clear view of what’s ahead.
Seeking alignment on ESG reporting: our regulatory snapshot, featuring views from DLA Piper
The current momentum in ESG policy-making is unprecedented. The recent developments in the non-financial reporting space spotlight the growing regulatory and investor demands for more quality corporate disclosure on ESG and ultimately, reinforce the need for senior corporate leaders and Board members to proactively embed ESG issues into their risk management, annual reporting and Board oversight processes.
Fill the form on the right to read the latest regulatory developments on corporate disclosures, in this exclusive snapshot featuring Datamaran and DLA Piper experts’ views.