News analysis
How to stop greenwashing
Greenwashing – the practice of companies pretending to be sustainable and environmentally friendly – is about to end in the EU. A new European directive means that for the first time, big companies operating in the EU will have to report on their environmental governance (ESG) in the same way they must report honestly on their financial affairs.
What’s happened?
The EU has published its Corporate Sustainability Reporting Directive (CSRD) policy outline. It is a massive shakeup of corporate sustainability, enforcing the publication of environmental impact alongside yearly financial data. This is what’s needed to fix ESG and stop greenwashing.
On November 10, 2022, the European Parliament voted to pass the Corporate Sustainability Reporting Directive (CSRD) – a new ESG policy framework that combines financial data, ESG information and assurance for the first time. 525 voted in favour, with only 60 against and 28 abstaining; a landslide.
In summary:
- ESG will become part of the annual reporting process
- Sustainability will sit alongside finances
- Far more data will need to be collected and analysed
- All of this, including sustainability, will be audited.
The CSRD aims to expand upon and replace the Non-Financial Reporting Directive (NFRD). Commissioner Mairead McGuinness of the European Parliament said in her opening remarks: “For the first time… we are putting sustainability reporting on an equal footing with financial reporting.
“We need accurate and reliable information to ensure that investments are made towards a more sustainable future. Companies need the information to plan their transition paths. And investors need the information to clarify what they’re investing in and combat greenwashing.”
A global first
This is a global first and one of the biggest shakeups of corporate auditing, ESG and sustainability. It will have far-reaching impacts on European businesses of a specific size and any European branch of an international company.
This is a big deal. It will have far-reaching consequences for all companies and subsidiaries operating inside the EU and subsequently will significantly boost the environment and ESG industry.
The new law can fix ESG and stop greenwashing
Despite its momentum and noble aims, the “E” in ‘Environmental, Social and Governance’ is broken. It continues to push a vast amount of money into funds and businesses that show insufficient or non-existent efforts to improve sustainability or tackle the climate crisis.
A lack of holistic policy underpins this weakness. No one knows or defines the true meaning of sustainability, there are no efforts to audit or analyse properly, and no single body to notice or punish misrepresentation of data or a failure to comply with the internal or external policy. That is, until now. This is an astonishing piece of legislation and one that is indeed overdue.
Around 50,000 organisations will need to comply with the CSRD in a phased rollout.
- From Financial Year 2024, all organisations are already within the scope of the NFRD (currently around 11,700).
- FY 2025: All “large” organisations with a net turnover of €40 million or more, at least €20 million in assets, and 250+ employees
- Later: All listed companies, including listed small and medium-sized enterprises (SMEs), excluding micro-enterprises
This law’s ambition is only matched by its necessity. Businesses can no longer ‘greenwash’, in which they hide insufficient climate action behind misreporting, or ‘greenhush’, in which they do the same by not reporting activity or impact. There will no longer be any ambiguity, which should have an incredible impact on corporate sustainability.
A vital issue for companies and boards, a significant cause of insufficient corporate sustainability, is a need for more education and engagement at the top. Many board members need to be educated on topics such as digital transformation, cybersecurity, and the environment, and many are not engaged; they are board members because of who they are and not what they know.
Read more: Half of boards don’t have KPIs to measure their ESG
Far more needs to be done
Although the EU is finally taking steps to enforce climate action better, this type of policy still needs to be addressed throughout most of the world. In its place, educating businesses is the second-best. This would ensure that company boards and directors understand the impact of the climate crisis and exhibit better governance when confronting it.
This opinion piece was first published on The People’s Place.
