Trust and communication around ESG

The debate around Environmental, Social and Governance (ESG) is still very lively, and – despite some raising their eyebrows at the effectiveness of such a tool – there is no doubt that these three ‘magic letters’ still matter for businesses, investors and consumers. For the third year in a row, SEC Newgate has prepared its Global ESG Monitor, conducting research to understand community awareness and perceptions around ESG issues and actions taken by corporates and governments in this space. A sample of more than 12,000 people across 12 countries and territories has been interviewed. Results show significant gains in:

• How important it is for companies to act on ESG issues.
• Awareness of ESG and related concepts like net zero;
• Interest in ESG issues; and
• Performance ratings for company and government on ESG overall and on most underlying metrics.

The 2023 report has also addressed new topics, including the issue of trust and communication around ESG. Unsurprisingly, greenwashing has gained traction and interest among consumers. In fact, trust remains a massive issue in ESG communications, with more than half the interviewees not trusting what organisations say about their ESG performance, and two thirds thinking that greenwashing is a big problem among companies in their country or territory.

Around half the interviewees globally have heard of the term ‘greenwashing’ and nearly two thirds think it’s a real problem. 63% said it was a big problem among companies in their country or territory, giving a rating of 7 or more out of 10, where 10 meant it was a major problem. The issue is strongest in countries like Colombia, Italy, France, and Spain.

EU rules on greenwashing in the making

Greenwashing has become a very hot topic in the last year, attracting significant attention from policy makers. In the EU, new rules are in the making, with a view to drive significant changes in the EU market as well as setting a blueprint for global action. In March 2023, the European Commission published a published a legislative proposal on substantiation and communication of explicit environmental claims (aka Green Claims Directive). The aim is to tackle false environmental claims by ensuring that consumers receive reliable, comparable and verifiable information, enabling them to make more sustainable decisions and to reduce the risk of ‘greenwashing’.

What is greenwashing and how will it be addressed in the EU?

• Definition: First things first, let’s define “Greenwashing”, which happens when a “company provides misleading or false information to consumers or investors about how environmentally friendly, sustainable or ethical its products and/or operations are.” This is also the definition used by SEC Newgate when conducting its research.
• Scope: The proposed EU rules will apply to voluntary explicit claims and environmental labelling schemes made by traders operating in the EU market about the environmental impacts, aspects or performance of a product, service or the trader itself in business-to-consumer commercial practices.
• Substantiation and communication of environmental claims are at the core of the proposal. Not only must claims be supported by scientific evidence, but they will also have to be independently verified. Independent bodies controlled by each EU member state will be responsible for the ex-ante verification.
• As at least 230 different labels have been found in the EU market, leading to consumer confusion and distrust, the new rules will also address the use of environmental labels as follows:
• New public labelling schemes will no longer be allowed, unless developed at EU level, and therefore valid for all EU Member States.
• New private schemes will be only allowed if added value is proved, meaning they must bring a higher environmental ambition than existing ones.
• From all the existing labelling schemes, only those considered to be compliant with the new Directive will survive and will be still allowed in the EU market.

When will it be adressed?

Negotiations on the proposal are still at a very early stages, and therefore, it should be kept in mind that the text may be subject to change. No specific timeline has been set yet, and – despite the ambition to finalise and adopt the new law before the EU elections in June 2024 – in reality this is starting to appear quite unlikely. In any case, one thing is sure: the proposal is here to stay, and these rules will be adopted sooner or later. Therefore, businesses should start preparing the ground well in advance, before the new rules hit, to avoid risks to their reputation, compliance, and competitiveness.

How can businesses prepare to survive the anti-greenwashing wave?

Over the next months, it will be important to monitor any policy development and debate around the EU Green Claims Directive, to understand in which direction the negotiations are going and what is most likely to be addressed by the new rules. From a business perspective, starting with a comprehensive assessment of all materials used for marketing purposes will be crucial, identifying any problematic claim. Moreover, as transparent and solid data will be needed to substantiate any future environmental claim, this is the right time to start preparing studies, life-cycle assessments and collecting any other useful information that could be required under the future legislation. These are usually very costly and time-consuming activities, and getting to start at the right time would bring a strategic advantage to the business.

The findings of our ESG Monitor leave little doubt that sustainability matters more than ever before. People are calling on businesses to care about their communities and the planet. They know companies have the power to look after the world around them, and – as such – businesses should not miss this call. Addressing greenwashing is one of the first steps.