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Shareholder greenwashing backlash targets directors

Author: ICAEW Insights

Published: 12 Apr 2022

A growing backlash by activist shareholders against greenwashing has moved on from corporate criticism to direct action against directors.

With AGM season underway, management teams are bracing themselves for the latest round of shareholder revolts. But it’s no longer just gripes about executive pay and dividend levels that they will have to contend with; this year, experts warn that management teams and company boards will find themselves under mounting pressure to justify their commitment to saving the planet, amid accusations of widespread greenwashing and empty environmental, social and governance (ESG) promises. 

With organisations churning out net zero pledges at a rate of knots, statements on environmental action are clearly the new black. However, selective ESG reporting facilitated by the absence of harmonised and mandated reporting standards on sustainability can leave the environmental rhetoric sounding, in some cases, rather hollow.

A report by climate thinktank InfluenceMap published last month says that the world’s 30 largest listed financial institutions are undermining their net zero targets by continuing to fund fossil fuel expansion and lobbying against attempts to align financial regulation with climate goals. Despite an increase in long-term climate targets and voluntary climate-related reporting, financial institutions continue to show a significant lack of meaningful short-term action in the face of the climate crisis, the report says: “This is evidenced by memberships in industry associations opposing policymakers’ attempts to implement sustainable finance policies, continued and considerable financing to fossil fuel value chains, and a lack of short-term roadmaps and milestones to meet their long-term targets.” 

Collectively these institutions have enabled at least $740bn (£561bn) of financing for the fossil fuel production sector during the past two years, InfluenceMap claims.

As climate risks mount, billionaire hedge fund founder Sir Christopher Hohn, quoted by InfluenceMap, is urging shareholders to vote against bank directors involved in “greenwashing”, and who lobby against climate action: “Any bank making a Net Zero promise while actively lobbying against necessary climate regulation – such as mandatory disclosure of borrowers’ emissions and climate action plans – is greenwashing. Shareholders should vote against the directors of banks who are hiding their exposure to climate risk,” Hohn says.

More generally, boards find themselves under increasing pressure to provide assurance about their organisations’ environmental pledges, against a backdrop of mounting investor expectations about climate action and an alarming lack of trust in the ESG data that they produce.

According to the Edelman Trust’s 2021 Barometer Special Report 86% of the 700 US investors surveyed believe that companies frequently overstate or exaggerate their ESG progress when disclosing results and 72% of investors globally don’t believe companies will achieve their ESG commitments.

Respondents to the Edelman study are clear that the buck stops with the board; 71% of US investors think it is important for the board of directors to be held accountable for maintaining a positive company culture. At the same time, 86% say a workplace culture that fosters employee empowerment is important for building trust and three quarters of global investors believe employee activism is indicative of a healthy workplace culture.

Bearing in mind that the US investors surveyed expect a rise in ESG-related litigation, the pressure for boards to step up their assurance activities is mounting. To avoid accusations of ‘greenwashing’ and to build trust with investors, boards have a responsibility to show that their ESG numbers do add up to something meaningful. 

Peter van Veen, ICAEW’s Director, Corporate Governance and Stewardship, said boards should be mindful of a groundswell of movement around metrics assurance: “We’re now seeing activist shareholders saying they’re not happy with the quality of ESG data they see – either because it’s difficult to verify or not trusted. Increasingly they will start to vote against boards and directors who they believe are deliberately misleading them or telling a better story than the data would indicate.”

The creation of a new standard-setting board—the International Sustainability Standards Board (ISSB) as announced by the IFRS Foundation Trustees in November last year is certainly a positive step in helping to meet demand for ESG assurance. The intention is for the ISSB to provide some harmonisation of sustainability-related disclosure standards and introduce some rigour behind sustainability reports.

Carbon Tracker’s Flying Blind report published last September warned that even those companies for whom climate is a material risk aren’t including it in their financial reporting. Auditors, meanwhile, often failed to pick up the lack of consistency between the narrative and the financial statements.

Richard Spencer, Director of Sustainability at ICAEW, said: “Where we need to get to is an understanding of what the financial impacts of these net zero pledges will be on the business and over time how they performed against the targets they set. The narrative can tell you a lot about ambition and intent but it doesn’t tell the world how you did. Companies are still making lots of claims but there’s very little about what their net zero commitment will do to their loan book or assets, for example,” he adds. 

However, Spencer admits that a lack of progress is largely due to the enormity of the task: “Lots of companies just don’t know where to begin. Data exists but it is often partial and imperfect and it is hardly surprising that companies struggle to know how to use it. For many organisations a net zero or nature-positive ambition will require a transformation of their business models and that isn’t necessarily a simple or uncomplicated process. I don’t doubt anyone’s ambition to do this, but I often wonder if they completely underestimate the enormity of the task.”

The role of finance as the custodian of sustainability data is clear, and yet too many sustainability teams are an add-on to corporate communication teams, with a remit to collect data to tell a good story. “Until this becomes core to the business and forces the same processes that generate financial numbers, there will always be a disconnect between what the business is doing and what is being reported externally,” van Veen says. 

Find out how accountants in business and practice can align corporate reporting to the Paris Agreement objectives at our dedicated Paris-Aligned Accounts hub

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