Milennials and Gen Z age groups are more likely to address accusations of greenwashing, and invest with companies with a strong ESG outlook, according to a regulators survey.
The Board of the International Organisation of Securities Commissions (IOSCO) has released a set of recommendations, charging companies to look to accusations of greenwashing, or conveying a false impression or providing misleading information about how a corporate’s products are more environmentally sound.
Gen Z investors are more likely to take accusations of greenwashing more seriously, according to the Deloitte Global 2021 Millennial and Gen Z Survey.
Climate change and protecting the environment (28% in 2020) was millennials’ number one personal concern a year ago, by a margin of six percentage points.
Approximately 60% of millennials and Gen Zs fear that the business world’s commitment to reversing climate change and improving the environment will be less of a priority as business leaders tackle the challenges presented by the pandemic.
New breed of ESG investors
The report also credits Millennials and Gen Z investors with the rise of ESG investing, as these groups are demanding more and more that people and the planet are put ahead of profits. They are also concerned with issues including racial inequalities and governance in the boardroom.
Dealing with these concerns has trickled upwards, as investment banking firm Goldman Sachs announced last year it will only be taking public companies if they have a diverse board.
“Goldman Sachs will only underwrite IPOs in the US and Europe of private companies that have at least one diverse board member. And starting in 2021, we will raise this target to two diverse candidates for each of our IPO clients,” CEO David Solomon said.
“This decision is rooted first and foremost in our conviction that companies with diverse leadership perform better.”
ESG is changing business, moving markets, and driving regulation
“ESG ratings and third-party data products have played an important role in the ESG ecosystem so far, especially in the absence of consistent and comparable issuer disclosures,” Ashley Alder, chair of the IOSCO, said in a statement.
“Their significance and usefulness will only continue as capital markets intensify efforts to support the shift towards a net zero economy”.
The lack of standards currently in this area can open up the risk regarding accusations of greenwashing, leading to a lack of trust in ESG ratings or affecting a company’s reputation, robustness and relevance.
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Regulators need to use a building blocks approach in setting up a universally accepted ESG reporting systems, says IOSCO, so investors are armed with reliable and consistent data and information.
Defining consistent standards and ways of measuring performance form the basis of the building blocks. Regulators also need to focus on greater transparency in the system of ESG reporting.
Effectiveness of regulators ramped up
These efforts will increase trust in the company’s ratings. Regulators can pile on the pressure by encouraging ESG data companies to reveal their methodology and framework as well as the areas covered, how these subjects are weighted as well as the metrics used to measure ESG performance.
To guard against accusations of greenwashing and to uphold standards, the US Securities and Exchange Commission created an ESG enforcement task force March 2021 to investigate ESG misconduct such as fraudulent reporting.
Despite these developments, there is much room for improvement in the regulatory framework for ESG reporting.
Unlike the financial reports published by corporates, ESG reports are usually not subject to regulatory oversight. There are also many ways in which ESG data service providers can measure a firm’s sustainability credentials.
The IOSCO said in their recommendations that this “raises concerns about the potential risks they pose to investor protection, the transparency and efficiency of markets, risk pricing and capital allocation”.
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