Greenwashing is the practice of making an unsubstantiated or misleading claim about the environmental benefits of a product, service, technology or company practice. Greenwashing can make a company or a fund appear to be more environmentally friendly than it really is.
How can we trust a rating of a company that is deliberately trying to mislead though greenwashing? What should we do when a fund makes false claims about the way it manages its assets? Such antics may work in the short term but as information becomes more generally available , not only does greenwashing become harder, but it becomes more visible.
Ratings agencies such as Morningstar and MSCI can standardise the method of rating meaning that many more companies can be audited, funds that deliberately exaggerate their capacity to enhance value through screens, tilts and share voting will get found out.
Those agencies, funds and companies who are trusted over the next couple of years will become authoritative in the future, those that are found cheating, will have no future within our portfolios.
This makes it all the more worrying that the International Accounting Standards Board can offer so little in assurance. Here is its chair, Hans Hoogervorst – reported in the FT last month.
“Setting sustainability reporting standards requires expertise that we simply do not have,” (Hoogervorst also flagged concern over the number of initiatives for sustainability reporting, which he said created confusion for investors and companies.
He noted that electric carmaker Tesla had a top ranking on MSCI’s sustainability index but was bottom in an ESG ranking devised by FTSE.
“People may be forgiven for not making head or tail of it,”
calling for consolidation in a bid to avoid “disclosure overload”.
Hoogervorst continued that sustainability reporting that focused on the future returns of a company was a promising development.
“Sustainability issues can already have an impact that needs to be reflected in financial reporting as it currently is,” .
Hoogervorst added: “Where climate-related risks could have a significant impact on a company’s operations, information about how this has been factored into impairment calculations would be relevant to the users of the financial statements.” The IASB is currently updating its guidance on how companies should write the narrative sections of their annual reports. One item may be to ask companies to provide more of a focus on intangible items relevant to their business, such as how climate change could affect their operation.
There is no short cut to probity.