Long reads

How standardised reporting frameworks can clarify greenwashing claims

Scott Hamilton

Scott Hamilton

Contributing Editor, Finextra Research

In our first story in this series, we highlighted some of the accusations made toward banks that are publicly committing on one hand to be sustainable; environmentally, socially, and in their governance policies and operations, yet are still actively lending to fossil fuel or other nonrenewable resource companies as customers.

Many of the world’s top institutions have been subject to increasing attacks for lacking consistency when it comes to their approach to these dual challenges - from their own and their customers’ operations - presented by ESG’s rise to prominence in the business world. Yet others seem to be managing the marketing and operating expectations of this new era of ‘verifiable sustainability’ much more successfully. Some comments from industry leaders and emerging definitions and practices can help explain why.

ESG: A plethora of platforms

There is some confusion around the issue of just how ‘green’ any company really is – because in most countries, until recently at least, all reporting of carbon and/or greenhouse gas emissions and other sustainability factors has been completely voluntary. Many different reporting systems have been used, in fact, as many as 100+ separate frameworks, often differing by industry or the particular structure of the organisations involved.

Many of the top ESG reporting frameworks have been around 20 years or more, meaning this isn’t really a ‘new’ issue, but making the process simpler is a major goal amid growing scrutiny as climate change threats and related concerns mount on every continent.

Aron Cramer, President and CEO of the international ESG consulting firm BSR (formed in 1992 as Business for Social Responsibility) points out: “Fragmentation serves no one’s interests…It is time to embed sustainability considerations in the basic functioning of the capital markets. That will only happen with universal disclosures that enable consistency.”

Consistency in reporting – help is on the way

Like other companies, some banks, on some measures, might look perfectly ‘green’ one year, but with evolving reporting standards or changes in corporate policies or activities, could receive much lower sustainability ratings the next. Increasingly, consistency in emissions reporting practices has become a principal focus for any bank that wants to avoid being called a ‘greenwasher’ by investment analysts,  industry watchdogs, or even its own customers.

Over the past several years, an increasing number of ‘greenwashing’ accusations have been hurled at hundreds of national and multinational companies, including banks, especially those which have shown inconsistencies of performance, or activities versus promises made and shared via their ESG statements.

What exactly is greenwashing? It takes many forms, though this charge can arise when a company or other organisation claims to be environmentally focused and sustainable in operations, but its actions and emissions reporting - or marketing campaigns - present inconsistent facts or results contrary to those expressed commitments.

On this front, there is some good news for everyone: The top five major ESG frameworks have pledged, as announced by the International Financial Reporting Standards (IFRS) Foundation in late 2021, to develop a unified, global reporting template, under the mantle of the new International Sustainability Standards Board (ISSB). Its goal is to create one uniform set of standards that all (or most) companies will be able to use; thus clear up, if not completely level, the playing field of sustainability information across the world.

No bank or other financial provider wants to be accused of greenwashing - of not following through on its sustainability promises to its employees, customers, investors, supply chain partners, communities and countries where it operates, or to the authorities which govern its activities. With new regulations being implemented now or expected in the near future in Europe and North America, and as Asia and Africa and other continents are likely to follow suit, compliance will soon be mandatory.

Much more complete, credible, and accurate reporting on numerous sustainability and social awareness and governance measures will be required. With most organisations expected to utilise the ISSB’s new standards, there will not be as many discrepancies in terms of reporting expectations. Therefore, companies which are authentically achieving their climate change adaptation objectives will stand out as success stories, while any marked failures by firms to meet their recorded sustainability promises will become clearly evident with close analysis of each quarterly ESG filing.

Scoping the challenge

The first two elements of the most popular frameworks are focused first on reporting carbon emissions of an organisation in its own operations and under its direct control, and then on the indirect emissions of energy sources it chooses to purchase and use to power those operations. These are called Scope 1 and Scope 2 emissions.

Things get much cloudier when it comes to Scope 3. This category includes other indirect emissions companies must collect and calculate from their own activities such as business travel, employee commuting, and most difficult, from the activities of external suppliers and customers all along their product/service lifecycle, including transport, delivery, and disposal of the reporting company’s goods after use.

It’s not just about the banks, but every entity along any company’s value chains. First to be impacted by legislation and new rules in Europe and the US are the largest size, public companies, then later, millions more firms of smaller size that comprise links in huge ESG reporting networks will be compelled to ‘do the work’ to analyse their own ESG reporting impacts.

Scope 3 supply chain partners can be either upstream (suppliers/vendors) or downstream (reselling partners or customers). How these connected parties operate and generate emissions from their own activities related to their suppliers/partners/customers is often the largest portion of the ESG reporting picture for larger, especially multinational companies. How to measure the individual outputs of thousands of Scope 3 connections to a given enterprise is a major challenge in itself, but one that industry analysts and regulators are insisting banks and other large, global firms embrace as part of their Net Zero commitments and to help achieve global warming 1.5C temperature increase targets for 2050.

Who is winning, and who is under fire?

In our next chapters in this series, we will take a look at a few financial services companies that have triumphed in the age of heightened sustainability and reporting scrutiny – and some that have faltered in their tasks to ‘walk the talk’ of their climate change commitments and promises.

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