ESG(REENWASHING) WHAT CAN WE LEARN FROM ABROAD?

By Dominic Varrie (Candidate Attorney), Nicole Sebanz (Associate), and Minnette Le Roux (Environmental Specialist) at NSDV

As environmental, social, and governance (ESG) disclosures become increasingly important to all stakeholders, greenwashing – tactics organisations use to exaggerate, mislead, or falsify their sustainability claims and credentials on their impact on the environment – becomes more pervasive.

Greenwashing in the context of ESG disclosures includes organisations “tweaking” their environmental disclosures in order to be perceived by the public as a more environmentally conscious organisation than they factually are.

The measures that have been implemented abroad in order to address greenwashing and facilitate accountability for ESG disclosures will certainly inform developments to the relevant South African regulatory framework in the future.

Greenwashing Risks In The Esg Context

According to a recent report published by PricewaterhouseCoopers titled PwC’s Asset and Wealth Management Revolution 2022, consumers and investors alike have developed a massive interest in sustainability-focused companies. In this regard, the PwC report projects that ESGfocused institutional investments will soar by 84%, and asset managers globally are expected to increase their ESG-related assets under management to US$33.9 trillion by 2026.

ESG investing will be astronomical. Greenwashing liability will be too.

With the ever-increasing global focus on sustainability and the significant interest in ESG-focused investments, it is highly likely that greenwashing allegations will increase and continue to garner mainstream attention. It’s very important that organisations implement measures to avoid greenwashing and ensure that ESG disclosures are accurate and transparent, in order to protect their investors, mitigate their ESG risks, and create value for all stakeholders.

In June 2022, the Johannesburg Stock Exchange Limited (JSE) released a document titled JSE Sustainability Disclosure Guidance that aims to “enable more useful, consistent, and comparable sustainability disclosure to inform better decision-making and action”.

It’s intended to be used as a guide for JSE-listed companies on best practice with respect to ESG disclosures.

It is evident from the JSE guidance document that South Africa has begun to reflect an awareness of the need to regulate greenwashing and improve the accuracy and accountability of ESG disclosures. However, despite these progressive steps, it is worth noting that South Africa does not currently have any legislative provisions in place that specifically address greenwashing.

Despite the above, greenwashing in South Africa is not without its risks, and organisations found to be engaging in greenwashing may incur liability regarding fraud; misleading or deceptive representations resulting in an infringement of consumer protection laws; the violation of competition laws; an array of possible regulatory complaints; and liability for directors failing to act in the best interest of the company.

Greenwashing may also result in pressure from the shareholders of an organisation in the form of shareholder activism, or even in the form of shareholder class actions. In light of this, greenwashing allegations can ultimately be incredibly damaging to an organisation’s reputation, and in turn, to its bottom line.

International Approach To Greenwashing

A big focus in ESG reporting globally is on responsible energy and water usage, when considering climate change and resource optimisation as the key disclosure areas.

Greenwashing-related litigation has therefore recently become prominent in relation to these disclosure areas. A research report from 2022 called ClimateWashing Litigation: Legal Liability for Misleading Climate Communications, by the Grantham Research Institute on Climate Change and the Environment and the Climate Social Science Network, says it’s estimated that since 2016 there have been at least 20 cases filed before courts in the United States (US), Australia, France, and the Netherlands regarding climate-washing (a type of climate change-related greenwashing).

It’s estimated that since 2008, at least

27 administrative complaints regarding climate-washing have been filed before oversight bodies in the United Kingdom, Australia, Italy, New Zealand, Denmark, the US, and South Korea. It’s evident that globally, organisations are increasingly being held accountable for greenwashing.

On a global scale, the International Sustainability Standards Board (ISSB) has confirmed that they will be issuing their first two finalised frameworks, IFRS S1 and IFRS S2, by the end of June.

IFRS S1 is designed to apply globally to corporates in all sectors and attempts to unify disclosure on factors such as waste and emissions, as well as on how to disclose all material sustainability-related risks and opportunities.

IFRS S2 will focus on specific topics, particularly on climate mitigation and climate adaptation. ISSB chair Emmanuel Faber says, “Companies already reporting under GRI won’t be able to simply cut and paste swathes of disclosures, because they will need to apply the ISSB’s investorfocused materiality lens. For companies reporting under multiple frameworks, this will make reporting less challenging.”

INTERNATIONAL SUSTAINABILITY STANDARDS BOARD (ISSB) FRAMEWORKS

■ IFRS S1: designed to apply globally to corporates in all sectors and attempts to unify disclosure on factors such as waste and emissions

■ IFRS S2: focuses on specific topics, particularly on climate mitigation and climate adaptation

WHAT ABOUT SOUTH AFRICA?

South Africa has traditionally followed the lead from abroad when it comes to ESG regulatory developments. It’s significant to note that one of the purported benefits of the JSE guidance document is to support the convergence of global reporting standards.

The adoption of the Corporate Sustainability Reporting Directive in the European Union, the rules proposed by the Securities and Exchange Commission in the US, the standards to be issued by the ISSB, the standard issued by the Canadian government, and the laws to be released in South Korea on greenwashing should inspire companies to question their ESG reporting and potential for greenwashing.

Ultimately, it appears that the best way to stay ahead of the curve in Africa is to develop a business-specific ESG scorecard, avoid greenwashing and facilitate accountability for ESG disclosures.