SEC Proposing Measures to Combat Greenwashing
With many scandals about greenwashing, regulators have started looking into the companies' practices. Sometimes, these firms that are allegedly applying new ESG strategies and looking into more sustainable ways to create growth, turn out to be greenwashing to gain credibility among their customers and earn points among regulators.
The metrics that will be looked into are sustainable investing ratings. Government treasury departments and the EU are already discussing tighter criteria for the rating agencies performing sustainability assessments of corporations and securities, according to the director of ESG at the UK's Financial Conduct Authority.
"The whole investment chain has to get involved, and ratings have to be regulated too," said Sacha Sadan at an industry event in London this week.
"People do get surprised when they see certain stocks [such as oil and gas] in a portfolio that’s an ESG best-in-class . . . and that’s why as a consumer regulator looking after people we have to make sure that is correct."
Regulators will, in fact, focus on transparency, conflicts of interest, and requirements to demonstrate the validity of metrics.
Due to the confusion from consumers and investors around the definition of ESG, Sadan highlights the contradiction between people who say "I’m ESG compliant" while he confessed "I’ve been in this industry for a while and I have no idea what that means". This is the reason why there needs to be a consolidation of the definitions related to ESG to avoid this situation.
A 2021 academic study led by researchers at MIT found that "available measures of ESG performance are noisy . . . and there is significant disagreement [between rating agencies] in their ESG assessments".
Regulators vowed then to take a closer look at ESG disclosures. This week, the Securities and Exchange Commission fined the fund management business of BNY Mellon $1.5 million for giving misleading information about its ESG investments.
Sustainalytics, one of the largest distributors of ESG data, stated, "We welcome well-calibrated rules that emphasize the transparency, integrity, and the independence of ESG ratings". The rating agency S&P Global encouraged interaction between governments and ESG product suppliers.
Industry participants blame the authorities for not being explicit about standards, thus increasing the possibility of misunderstanding. Sadan announced that attempts were being made to help coordinate authorities' communications across borders.
Source: Financial Times
