The growing backlash against greenwashing in ESG reporting
This increasing skepticism of greenwashing has manifested in the rapidly evolving “Say on Climate” resolution discourse. At their 2021 AGM, multinational oil and gas giant Royal Dutch Shell received overwhelming support from its shareholders on its management-endorsed energy transition strategy proposal, receiving 88.8% support. Only a week later, a Dutch Court ruled that the company wasn’t doing enough on climate change and must reduce its carbon emissions by 45% by 2030. This outcome has led investors and other stakeholders to delve deeper into the nitty gritty details of climate change strategies and associated proposals.
Mining giant BHP found this out when it tabled a similar resolution at the October AGM of its UK arm, garnering only 83% backing from shareholders after proxy advisor Glass Lewis recommended against it.
That opposition came despite Glass Lewis conceding that BHP “has a solid governance structure for its climate-related considerations: several directors have relevant skills and experience, climate and ESG are integrated into the executive incentive program, the company engages on the topic regularly with a variety of stakeholders, and the board has clearly outlined how the topic is governed at management level”.
The proxy advisor based its opposition on doubts that the company’s climate-related targets and disclosures were science-based or achievable, and a significant proportion of BHP’s shareholders appear to have concurred.
Growing demand for harder numbers in ESG reporting is also highlighted by a recent threat from major institutional investors to oppose the reappointment of auditors of the companies they invest in unless they provide “the visibility we seek on the potential financial implications of a 1.5C pathway”.
While corporate and national commitments to goals such as net zero abound, concrete strategies for getting there are less common. The Say on Climate initiative says fewer than 5% of companies have committed to setting science-based emissions targets.
The Science Based Targets Initiative, a coalition of the World Wildlife Fund, the World Resources Institute and other institutions, is attempting to tackle the problem with a rigorous certification of companies’ net-zero targets. Aligned with the Paris Agreement’s goals, it recently accredited a first batch of companies including AstraZeneca.
When it comes to financial reporting, global guidance is provided by widely accepted norms such as those of the International Financial Reporting Standards. In contrast there are a number of ESG reporting frameworks, which can make Sustainability Reporting a challenge for companies as they navigate these different requirements and preferences amongst their investor-base. In the absence of agreed sustainability reporting standards, it’s far from clear just what hurdles companies must clear to satisfy wider demands for better data.
Even national 2050 net zero emissions plans are strikingly vague. That of Australia, for example, is supported by very little detail or modelling, and relies heavily on unspecified future “technology” that is yet to be developed.
Australia’s net zero strategy, like those of most nations and large corporations worldwide, also makes substantial use of carbon offsets, an accounting mechanism with a growing credibility problem.
Supplied by an international patchwork of informal and unevenly regulated markets that lack consistent standards and oversight, offsets are susceptible to a host of problems including obfuscation, double counting and adverse impacts on communities in poorer parts of the world.
One of the world’s largest carbon markets, the EU Emissions Trading System, concedes there are problems and is currently developing methods to increase the credibility of carbon offsetting. Yet for critics such as Jennifer Morgan, executive director of Greenpeace International, there’s no fixing the fundamental flaws in the offset system.
“Offsetting doesn’t stop carbon entering the atmosphere and warming our world,’’ says Morgan. “It just keeps it off the ledgers of the governments and companies responsible.’’
Companies and their directors have been placed on notice that they could be sued in some jurisdictions for net zero pledges or emissions reductions targets regarded as misleading or deceptive. But what precisely is misleading: for example, could commitments that fail to adequately address the conundrum of Scope 3 emissions potentially be construed as greenwashing?
As Glass Lewis noted in their analysis of BHP’s Climate Transition Action Plan, that company has set itself a laudable goal of net zero Scope 3 by 2050 but provides little detail of how it intends to get there.
Scope 3 data is notoriously difficult to collect and parse, but its importance is hard to overstate. In BHP’s case by the company’s own calculations it constitutes 96% of emissions - 402.5 million tons of carbon dioxide-equivalent in the year to June, or more than the total emissions of the UK.
For business, this poses challenges as well as opportunities – for example, Blackrock CEO Larry Fink has said he thinks the next 1,000 unicorns will grow out of climate-related technologies.
As corporate goals and disclosures on ESG increasingly align with public expectations, perhaps the golden age of greenwashing is approaching its end.