The Surge in Sustainable Finance & Public Expectations

As consumers or investors, our decisions are now being driven not only by the price of products and the financial return of investments but also by the values of the companies behind those products and investments. Take the story of success of some brands that chose to build their business models around sustainability, and the severe reaction of consumers and investors against other brands that have opted to resist this necessary new ethical approach to business: both demonstrate how much sustainability has already been incorporated as a public value and a condition for financial resilience and success.

The substantial growth of ESG (Environmental, Social, and Governance) investing is another indication of sustainability’s prevalence in our society today. As of June 2023, one of the world’s largest asset managers reported an increase in its ESG assets under management (AUM) to US$ 2.5 trillion, up from US$ 1.2 trillion just two years prior. This explosive growth of ESG investing underscores the robust interest from investors globally in sustainable finance.

This fundamental shift towards a more sustainable economy has also spurred organizations of various sizes to promote and celebrate their sustainability efforts. Organizations communicate their “aggressive net zero goals,” “sustainable investment vehicles,” and more through data-driven reporting and vibrant advertising campaigns. In doing so, they inform the public of their commitments towards the environment, society, and their own governance. For instance, some companies are targeting, or claim that they have reached, “net zero” carbon emissions. Others claim they will be not just carbon neutral, but also carbon negative by 2030.

As the pressure on companies to act more sustainably has risen, so has the imperative of timely, relevant, and trustworthy sustainability information. This new information is increasingly being used to support decisions made by investors, customers, workers, government agencies, and other stakeholders. It is therefore critical that this information is as reliable as financial information.

The Skepticism Crisis: But is All This Information Trustworthy?

Before taking over as Chair of the IESBA, I served as Chair of the Portuguese Securities Commission (CMVM), and a member of the Board of the International Organization of Securities Commissions (IOSCO). These positions require ample awareness of the capital markets’ needs and being conscious of the close links between high-quality, ethically prepared and presented corporate information, and well-functioning capital markets.

But the demand for reliable sustainability information has gone well beyond the capital markets and is coming from all economic and social partners, including individuals, concerned about understanding the impacts of each activity on the sustainability of the system. As stakeholders clamor for more data on sustainability, the amount of available relevant information has also risen dramatically. This surge presents organizations with opportunities to cherry-pick or exaggerate, or even misrepresent their sustainability credentials to enhance their public image. This raises a significant public interest concern that sustainability credentials might be overstated or manipulated for corporate gain:

• Yale & George Mason University Survey (2021): Found that 71% of Americans believe companies’ claims to be sustainable even when their actions are not, showing widespread public skepticism.
• Global Executive Survey (2022): Revealed that two-thirds of executives expressed doubt regarding the authenticity of their own companies’ sustainability efforts.

“Without strong ethics in the production, reporting, and assurance of sustainability information, there are significant risks of issues like ‘greenwashing’.”

Merriam-Webster defines greenwashing as “the act or practice of making a product, policy, activity, etc., appear to be more environmentally friendly or less environmentally damaging than it is.” With widespread developments in sustainability, it is no longer only about the environment, but also encompasses societal and governance impacts.

Notable Greenwashing Breaches in Corporate History

A classic example in recent history is the Volkswagen “Dieselgate” scandal in 2015, which led to billions of US dollars in fines and a tarnished reputation for fraudulently altering diesel emissions software while marketing vehicles as eco-friendly. But Volkswagen is not alone: accusations against famous global brands — from Deutsche Bank to IKEA, from H&M to Coca-Cola — for hiding unethical practices behind shiny green marketing show how critically trust is needed.

Greenwashing undermines the progress being made daily towards sustainable solutions and damages the credibility of sustainable finance. It leads to a loss of investor and consumer confidence, which over time will cause reduced capital allocation to sustainability initiatives and eliminate incentives for corporations to change.

Root Drivers of Misleading Sustainability Disclosures:

1. Subjectivity of Metrics: Existing sustainability metrics are far more subjective than established financial and operational accounting rules, allowing underperforming entities to present results in an artificially favorable light.
2. Excessive Narrative Pressure: Public pressure to report progress against ambitious commitments, combined with low technical understanding, pushes corporations to engineer exaggerated narratives.
3. Lack of Standardization: Absence of overarching global statutory standards leads to arbitrary measurement and reporting practices.

Ethical Behavior: Foundational to a Sustainable Future

For sustainability efforts to be meaningful, investors and stakeholders must trust sustainability disclosures as much as they trust audited financial statements. Understanding what is being measured is only part of the challenge; verifying and validating data, and understanding sustainability’s direct impact on financial statements and forecasts, are critical components.

To solve this puzzle, the global standard-setting community is erecting a cohesive Three-Pillar Architecture:

• Pillar 1 (Disclosure Standards): The International Sustainability Standards Board (ISSB) is developing baseline sustainability disclosure standards for global capital markets.
• Pillar 2 (Assurance Standards): The International Auditing and Assurance Standards Board (IAASB) is developing an overarching international sustainability assurance standard.
• Pillar 3 (Ethics & Independence Standards): The International Ethics Standards Board for Accountants (IESBA) is developing globally applicable ethics and independence standards for sustainability reporting and assurance.

Standardization and technical regulations alone cannot prevent greenwashing — an ethical foundation is absolutely necessary to promote authentic actions within organizations. Intent matters, and organizations must demonstrate genuine accountability.

“The integrity of the information provided to investors and other users is a core element of the system.”

Ethics as the Cornerstone of Reliable Reporting

From my professional experience in financial markets and corporate governance, it has always been my deep conviction that ethics forms the cornerstone of public trust in organizational reporting. Ethical behavior underpins data integrity, guiding corporate leadership to build cultures where accountability is celebrated and rewarded.

The IESBA International Code of Ethics for Professional Accountants (including International Independence Standards) serves as the global “north star”:

• Formally adopted in over 120 jurisdictions and translated into about 40 languages.
• Grounded on five fundamental principles: Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, and Professional Behavior.
• Guides accountants to maintain the rigor of their analyses, exercise an inquiring mind, and actively challenge management representations.

The IESBA Roadmap: Profession-Agnostic Standards by 2024

In October 2022, IESBA released the landmark Q&A publication: “Ethics Consideration in Sustainability Reporting, Including Guidance to Address Concerns about Greenwashing”. In response to requests from IOSCO, IESBA has committed to creating globally applicable, profession-agnostic ethics and independence standards:

• Global Multi-Stakeholder Roundtables: Earlier this year, IESBA conducted roundtables in Paris, Sydney, Singapore, and New York, engaging investors, regulators, standard setters, accountancy bodies, and non-accountant assurance providers.
• Standard on the Use of Experts: Addressing the multidisciplinary nature of sustainability data (e.g., carbon engineers, climate scientists).
• Timelines: Exposure Drafts released by late 2023, with final enforceable standards issued by end-2024.
• Profession-Agnostic Applicability: Studies show that more than half of sustainability assurance engagements globally are conducted by independent assurance providers outside the accounting profession. To serve the public interest, IESBA’s upcoming standards will apply to all sustainability practitioners, holding accountants and non-accountants to the exact same high bar of ethical conduct.

Conclusion

We have an unprecedented opportunity — and an obligation — to promulgate robust, globally applicable standards to support trustworthy sustainability reporting and assurance. Doing so will foster public trust, enable companies to develop authentic green strategies, stamp out greenwashing, and satisfy the legitimate expectations of investors, regulators, and society.

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Author may be reached at: eboard@icai.in