When manufacturers and fund managers have processes in place to measure and communicate their environmental, social, and governance (ESG) footprint, they earn the trust of the public, investors, and government regulators. This trust is often built on a foundation of ESG disclosures — a practice which is still in the early stages of becoming standardized. For manufacturers, this means that ESG reporting can be a complicated process to do successfully, and for consumers it’s not always clear what messages to trust.
Very recently, ESG disclosure accuracy has come under scrutiny as a matter of economic stability, especially those ESG claims being made by investment firms. In March 2021, the Securities and Exchange Commission (SEC) created a Climate and ESG Task Force with the explicit mandate to “proactively identify ESG-related misconduct.” This specifically includes misconduct related to fraud in ESG disclosures, also known as greenwashing. Greenwashing comes in many forms:
- The deliberate use of misleading or deceptive environmental claims to create perceived value around a product or service
- Inaccurate sustainability claims due to a lack of deep, reliable insights into the product
- Unverifiable claims stemming from missing due diligence processes
Greenwashing comes with many risks, including brand damage and loss of consumer faith, potential market access issues, and lawsuits. As the SEC ramps up enforcement and investigations, businesses found greenwashing are starting to see steep fines, already reaching over a million dollars in some cases. And no business is above scrutiny: Even global investment management firm Goldman Sachs has faced SEC investigation for greenwashing.
Because ESG scores and key performance indicators (KPIs) have become powerful market and investment drivers, the SEC’s ESG Task Force is cracking down on greenwashing. With greenwashing on the rise, the SEC is making moves to protect the reliability of ESG disclosures, which are one of the prime data sources used by investors and consumers.
Precedent-Setting Cases in ESG Enforcement
The Climate and ESG Task Force has already pressed charges against two businesses for ESG greenwashing, and in both cases an important precedent has been set. In addition, the SEC is investigating Goldman Sachs over certain ESG claims made by some of its funds, including those rebranded from the “Blue Chip Fund” to the “US Equity ESG Fund” in June 2020. At this time, the investigation is ongoing and neither party has any public comment.
The SEC pressed charges against a Brazilian mining company, Vale S.A., for alleged greenwashed claims while raising more than $1 billion on the U.S. stock market. Vale S.A., is one of the world’s largest iron ore producers. Following the catastrophic collapse of Vale’s Brumadinho dam in 2019, the SEC investigated claims made in Vale’s ESG disclosures about the human and environmental safety measures regarding its dam management. The ESG Task Force found evidence of misleading claims about the dam’s safety and structural integrity in ESG reports from 2016 and 2018, including public comments from the president and the CEO, as well as in a webinar hosted on Vale’s website. That the SEC investigated these sources is notable, as ESG reports and ESG webinars have often been considered a public relations tool rather than a regulated business disclosure. Now that the SEC has moved to formal enforcement of greenwashing, manufacturers need to ensure that any and all ESG communications undergo rigorous due diligence before publication.
In the second case, the SEC fined fund management firm BNY Mellon Investment Advisor (BNYMIA) for alleged overstated and misleading claims about the ESG screening policies of its managed funds where in reality, only about one-third of the advertised screened offerings underwent review. Furthermore, the SEC found that BNYMIA was missing processes to ensure that ESG due diligence claims were verified, resulting in communications that investors could reasonably misinterpret. In May 2022, BNYMIA agreed to pay a $1.5 million penalty, and accept a censure and cease and desist order. This case sets a precedent that manufacturers can not only get fined for greenwashing, but also for lacking proper due diligence processes.
These cases establish what can be considered clear indicators of where the SEC will be focusing in future investigations, namely that any public ESG statements are fair game and that unintentional greenwashing through lack of policy safeguards is still ESG misconduct.
Best Practices for Defensible Supply Chain ESG Disclosures
Manufacturers establishing an ESG program, or looking to improve an existing ESG program, should follow industry recommendations for avoiding intentional and accidental greenwashing. In particular, the Federal Trade Commission (FTC) publishes the Green Guides with guidelines for corporations to avoid making unsubstantiated ESG claims, including standards for making recycled content claims, compostable claims, and how to avoid overstating environmental benefits.
For manufacturers, it’s also essential to focus on supply chain sustainability because the ESG performance of your suppliers has a direct impact on your overall ability to make sustainability claims. Suppliers are a primary source of ESG data needed to substantiate your green marketing claims. That’s why supply chain sustainability should be one of the first areas that manufacturers invest their ESG efforts in and an ideal place to start building a program foundation. This will also support overall business continuity — a sustainable supply chain will lead to a more stable supply chain!
To help manufacturers with complex supply chains benefit from sustainability marketing and confidently avoid the risks associated with greenwashing, Assent’s supply chain sustainability experts have created the The Manufacturer’s Guide to Avoiding Greenwashing, a free download that outlines how to harness your product compliance and supply chain data to build stronger green claims that stand up to regulatory scrutiny.