Firms to clean up greenwashing

The Swiss government tends not to pick fights with its financial services sector. Switzerland’s 243 banks and 195 insurance companies generate about a tenth of the nation’s economic output and account for a fifth of its market capitalisation. As a result, the importance of the industry is duly appreciated by most policymakers.

But the Swiss authorities have recently confronted the industry over greenwashing, the practice by which companies overstate their ecological bona fides. The small Alpine state has indicated that stricter rules are on the way to combat the practice, despite the insistence of the Swiss Bankers Association that self-regulation is ‘a more flexible instrument to avoid greenwashing’.

Global clampdown

The tussle between Switzerland and its bankers is far from isolated. Governments around the world are increasingly clamping down on unjustified ecological boasts by companies across the full range of industries. In August the European Parliament and Council reached a provisional agreement to ban misleading green marketing. The rules, which, if approved, would need to be incorporated into law by member states within two years, prohibit the use of generic labels such as ‘environmentally friendly’ without ‘proof of recognised excellent environmental performance relevant to the claim’.

Concern has been building in recent years. Research published by the European Commission in 2021 uncovered endemic levels of greenwashing in the region, with 42% of green claims turning out on inspection to be exaggerated, false or deceptive. And the US and China have been taking similar steps to discourage companies from promoting green claims that are unsupported by evidence.

Beyond the growing risk from regulators, greenwashing risks alienating customers, investors and employees, says Ioannis Ioannou, an associate professor at the London Business School and an expert on corporate sustainability. ‘Consumers are ever more likely to boycott products that are falsely labelled as “green” or “eco-friendly”’, he observes. ‘And investors may sue companies that provide inaccurate or misleading information about their environmental performance.’ Greenwashing can therefore harm the reputation and credibility of a company, leading to potentially grave legal and financial damage.

Professional help

So, with accountants playing an ever more prominent role in monitoring and reporting sustainability metrics, how can the profession help to head off such concerns?

For a start, it is crucial for accountants to understand the principles that are guiding regulations in much of the world, says Professor Ioannou. There are three main aspects that businesses should consider in their environmental communication, he argues.

The first is specificity. ‘Instead of using vague terms like “green” or “eco-friendly”, companies should use quantifiable metrics like “reduced carbon emissions by 20%” or “increased renewable energy sources by 50%”,’ he explains.

Second, claims must be supported by data. ‘Companies should use third-party verification or certification to validate their environmental performance and disclose their sources and methods of data collection and analysis,’ says Ioannou. ‘Being data-driven also helps businesses identify and address the gaps and challenges in their sustainability practices and improve their performance over time.’

Finally, businesses should be transparent. ‘It is important for companies to disclose both the success and the challenges in their sustainability journey,’ he argues. ‘Acknowledging and learning from failures demonstrates a genuine dedication to continuous improvement in environmental practices. Transparency also helps companies build trust and rapport with their stakeholders.’

Accountants are becoming increasingly crucial in the preparation and disclosure of environmental, social and governance (ESG) reporting, ensuring that this is accurate, reliable and comparable. ‘As ESG accounting and reporting practices come under closer scrutiny, the role of accountants in ensuring the integrity of the underlying data and analysing changes over time and future forecasts will become even more important,’ says Ioannou.

‘These skills are also essential in the domain of ESG investing, given the increasing focus on integration of ESG metrics into investment decisions and across asset classes.’

Firms spot opportunity

Meanwhile, the major accountancy firms have spotted an opportunity to expand their offering to corporate clients. ‘Top firms have already developed capabilities to assist organisations in providing reasonable and limited assurance on ESG information,’ observes Ioannou. ‘This role includes identifying which metrics should be reported, developing methods to measure these metrics, and establishing processes and controls to produce and verify ESG reports.’

Such expertise also puts these firms in a position to help shape reporting standards and practices. For example, KPMG has played a pivotal role in shaping the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which aimed to improve the consistency and comparability of climate-related financial information.

However, accountancy firms also face some challenges or limitations, according to Ioannou. ‘Despite the progress, there is still no universally accepted framework for ESG reporting,’ he says. ‘Accountants also have to contend with the diversity of stakeholder expectations and demands, and the potential conflicts of interest or ethical dilemmas that may arise from their dual role as auditors and advisers. Therefore, accountancy firms need to constantly adapt and evolve to meet the changing needs and expectations of the market and society in relation to ESG reporting.’

Ecological reporting and marketing, therefore, remains a minefield for businesses. But it is clear that the consequences for companies of making bogus claims are becoming increasingly serious. There is a clearer sense among regulators that greenwashing has the potential to give companies an unfair advantage over rivals in attracting customers or investors – and as a result cannot be tolerated.

Based on their longstanding role in preparing and certifying financial reports, accountants will be front and centre in the effort to ensure that there is a level playing field between companies.