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Curbs on greenwash coming

Stronger standards and disclosure in 2022 can ensure environmental, social and governance claims are genuine.

The environmental, social and governance standards expected from business have advanced strongly, but 2022 will see a myriad of changes to disclosure rules on issues such as diversity, executive pay and climate. However, we expect regulators to increasingly seek to curb greenwashing – making firms look greener than they really are.

Although environmental issues tend to be most prominent, investor awareness of social and human capital issues rose sharply in 2021. More governments are focusing on diversity, setting mandatory targets or requiring disclosure of diversity metrics and policies.

Besides gender diversity, awareness of ethnicity and racial diversity is increasing. However, investors should also watch for the development of issues such as neurodiversity, age diversity and group-think. And with more contract workers in the growing gig economy, there is an increasing focus on labour rights.

Several regulators have updated disclosure requirements over the past year, but to avoid greenwashing it is necessary to distinguish between the disclosure of ESG information by listed companies and the disclosure of how funds and fund managers take ESG into account.

Disclosure by listed companies encourages them to collect data to help them address ESG issues and inform investors of their ESG risks and opportunities. Disclosure by funds informs potential investors how the fund manager uses ESG information in considering investments.

With strong flows into ESG funds, tougher scrutiny of the funds and their managers would improve the integrity of ESG objectives and avoid greenwashing.

The availability and quality of data is often cited as a barrier to ESG investing, but assurance can contribute to the credibility, comprehensiveness and transparency of information. The EU and New Zealand have already adopted rules for independent sustainability-reporting assurance and we expect more regulators will shift to internal or independent assurance approaches.

However, to avoid greenwashing, it is important to distinguish between assurance of process – ensuring rules for obtaining and recording information are followed – and assurance of data, to ensure the integrity of the information.

Different markets have an array of ESG reporting standards and frameworks. Unifying them would help investors to compare data. The International Financial Reporting Standards Foundation aims to issue a final standard this year that could allow investors to compare companies’ sustainability performances.

Meanwhile, the UK plans to introduce several environmental policies in 2022, including a plastic-packaging tax, the Shanghai and Shenzhen stock exchanges have proposed adding a corporate-governance section to their listing rules, and in the US, President Biden is prioritising ESG matters such as racial diversity and environmental justice while the SEC regulator is working towards a new climate-risk disclosure rule.

The trend to a cyclical economy and locally-produced products – accelerated by last year’s supply disruptions and port congestion – has highlighted the ESG issues surrounding supply chains. We see greater adoption of blockchain and internet-of-things technology, plus robotics and other automation, and we expect more cybersecurity and data-protection regulations in 2022.

We also expect board decision-making to better reflect sustainability considerations in 2022, with the EU introducing a sustainable corporate-governance framework. And there could also be new requirements for boards on sustainability expertise, due-diligence information and sustainability metrics within variable executive pay.

First published 5th January 2022.

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