It is no doubt that the discussion about ESG as a factor in investing has grown exponentially in the last few years. This paper will explore the shortcomings of voluntary ESG reporting mechanisms. It will further argue that private ordering alone cannot be trusted, as the goals of individuals who are in charge of such private reporting may differ from the sustainable development goals that the market is in dire need of today. A balanced approach of private regulations in the market backed by scientific and robust State regulations are the best way to ensure that quantifiable targets are achieved in the field of sustainable finance.
The recent trends in the market have shown climate change becoming an important issue, with investors increasingly demanding businesses to provide disclosures on impact of their activities on the environment and how they plan to reduce greenhouse gas emissions in their operations.1 A research report published by Deloitte reveals that unchecked climate change could cost the global economy US $178 trillion in net present value terms from 2021-2070. The human costs would be far greater: a lack of food and water, a loss of jobs, worsening health and well-being, and reduced standard of living.2 With more and more science-based research being released, it is becoming evident that the market needs swift, decisive steps towards developing a much environmentally safer economy.
Environmental, social, and governance (ESG) investing has increased dramatically over the last decade. It is becoming evident that the environmental, social, and governance factors can affect long-term performance of the investments. Considerable attention has been given to ESG criteria and investing, due in part to at least three factors: First, recent industry and academic studies suggest that ESG investing can, under certain conditions, help improve risk management and lead to returns that are not inferior to returns from traditional financial investments. Second, growing societal attention to the risks from climate change, the benefits of globally accepted standards of responsible business conduct, the need for diversity in the workplace and on boards, suggests that societal values will increasingly influence investor and consumer choices may increasingly impact corporate performance. Third, there is growing momentum for corporations and financial institutions to move away from short-term perspectives of risks and returns, to better reflect longer-term sustainability in investment performance. In this manner, some investors seek to enhance the sustainability of long-term returns, and others may wish to incorporate more formalised alignment with societal values. In either case, there is growing evidence that the sustainability of finance must incorporate broader external factors to maximise returns and profits over the long-term, while reducing the propensity for controversies that erode stakeholder trust.3
Worldwide, the amount of money held in sustainable funds, and ESG-focused exchange traded funds (ETFs) rose by more than 50 per cent in the past year to US $2.8 trillion, delivering billions of dollars in management fees to those running sustainable funds.4 The growing investor interest in ESG factors reflects the view that environmental, social, and corporate governance issues — including risks and opportunities &madash; can affect the long-term performance of issuers and should therefore be given appropriate consideration in investment decisions.5
In tandem with the growth of ESG investing, sustainability-focused shareholder activism has also increased. For example, at BP’s 2019 AGM, two special resolutions in relation to climate change issues were requisitioned by shareholder groups coordinated by Climate Action 100+ and Follow This. One of these resolutions sought that BP include in its annual report from 2019 onwards a progress report describing how its business strategy is consistent with the objectives of the Paris Agreement6, supported by information relating to relevant capital expenditure, metrics, and targets. This resolution was passed at the AGM with the support of 99% of shareholders, demonstrating the importance to investors of ESG credentials and their disclosure.7
However, this rising interest in the ESG sector is accompanied by a huge temptation for asset managers to indulge in greenwashing, endowing their investment offerings with a spurious aura of social and climate engagement.8 A recent example of this has been the charges levied by the US Securities and Exchange Commission (SEC) on BNY Mellon Investment Adviser, Inc. The SEC on 23-5-2022, charged BNY Mellon Investment Adviser, Inc. for misstatements and omissions about environmental, social, and governance (ESG) considerations in making investment decisions for certain mutual funds that it managed.9 To settle the charges, BNY Mellon Investment Adviser agreed to pay a $1.5 million penalty.10
These developments are a testimony to the fact that it can no longer be debated that to combat this existential threat, climate risks should be brought to the heart of financial decision-making, climate disclosure laws must become comprehensive and uniform (in-principle); climate risk management must be transformed, and sustainable investing must go mainstream across the world. For this to happen the ESG disclosure regimes around the economies of the world need to be bolstered. Inclusion of such disclosures in shareholder statements/prospectuses/annual reports would be a huge step in the right direction to ensure the interests of all stakeholders are protected.
To that end, in the first part of this paper, we shall seek to understand the nuances of the current ESG disclosure regimes that are largely composed of voluntary private reporting. Further, we will examine if there are any shortcomings in such voluntary private reporting mechanisms and the premise of voluntary reporting itself. In the second part of the paper, through case studies, we shall seek to understand how the aforementioned shortcomings have been exploited to pose challenges to the sustainable market experiment. We shall also examine the need for State intervention in the form of ESG regulations that work in tandem with the existing market standards. Lastly, we will conclude as to why State regulations shall be crucial in the coming times for ensuring corporate accountability and how such regulations could further act as a strong medium of ensuring that businesses take more long-term, sustainable approaches in their operations.
Current state of ESG disclosure standards
The recent trends reflect mainstream investors’ growing recognition of the relationship between material ESG factors and financial risk and return, making the term “non-financial” under which, the ESG factors have been classified, somewhat of a misnomer.11 This incorrect classification prevents the regulatory authorities from regulating the “non-financial” data in many instances.
Still being considered a “non-financial” factor in investing, ESG reporting is still largely voluntary and driven by various forms of private ordering, including corporate engagement with shareholders and other stakeholders, reliance on private standard-setters and private governance regimes to promote corporate accountability and transparency, and self-regulation by companies, such as voluntary sustainability reporting and corporate social responsibility (CSR) commitments.12 In such cases the standards of reporting are generally set out either by the industry itself or by NGOs, public participation, and other non-State actors. For instance, signatories to the United Nations Global Compact are expected to communicate their progress annually in order to explain the steps they have undertaken to be compliant with the United Nations Global Compact’s ten principles on responsible business practice.13 Various ratings agencies such as the Dow Jones Sustainability Index, Morgan Stanley Capital International (MSCI) ESG Research, Sustainalytics and Thomson Reuters ESG Research Data (amongst others) also provide scoring systems based on ESG performance. Whilst in theory, these are useful mechanisms for making informed assessments about companies’ ESG practices, scoring systems can use inconsistent methodologies and assessment criteria and so consistency and transparency problems persist.14
The disparity in the standards set out for ESG starts right from here and goes on to get wider as we move further into the realm of sustainable international financing. The growing demand from the public has resulted in companies adding more and more ESG information to their reports, however, since every company can develop its own standard and metric upon which to report, these reports are of little use. From an investment standpoint it is possible for each company to portray its commitment to do better for the environment, to attract more investors, while doing bare minimum in reality.15
The problem is further complicated when we investigate the operations of multinational corporations (MNCs). Factors such as cheap cost of labour, increasing ease-of-doing business regulations and relatively relaxed environmental policies have so far been major reasons for MNCs to move one or more parts of their line of production/services to developing economies. These differences have often resulted in a staggering increase in pollution and destruction of labour rights in these developing economies. To further aggravate the issue, MNCs rely on having operations in various jurisdictions which provides them a chance to “pick and choose” the ESG disclosure regime to follow for the various aspects of their businesses.
Challenges with voluntary ESG disclosures
Inconsistent collection and reporting of data
It is not the case that the companies do not disclose the data they procure in the interest of investors or as a part of their risk assessment and avoidance plan for their business. In fact, the volume of non-financial information being made available to the public has surely increased, the underlying idea of sustainability also has found a footing in the business’s roadmap. While there is a plethora of ESG related disclosures made by companies available publicly, however, investor surveys and research undertaken by Task Force on Climate-related Financial Disclosures (TCFD), Organisation for Economic Cooperation and Development (OECD) and the United Nations has shown that the current disclosures are not adequate enough and cannot be relied upon while making analysis of investments.16 The expansion in the scope of non-financial factors which are brought under the head of ESG has increased the amount of information available publicly exponentially, making it difficult to identify actually important information.
Further, most ESG data ultimately used by rating firms and other ESG factor integrating institutions is voluntarily reported by the companies being rated.17 The reporting occurs through the publication of annual sustainability reports or through informal responses to voluntary surveys driven largely by rating firms.18 This way, voluntary reporting allows for near complete customisation of style, format, and content of disclosures, and “provides ample room for companies to manipulate the disclosure process”.19 Such practices of making weak disclosure erodes investor trust in the information for identifying risks, etc. It also weakens the ability of a company to respond to anticipate in real time the risk they might have to encounter.
Voluntary disclosure regimes suffer from other limitations as well, a notable example of this was with the Goodyear Tire & Rubber Company. The company was awarded a higher scoring by Sustainalytics. Sustainalytics had given the higher scoring possibly due to the extensive disclosures they had made despite the fact that the company was facing several ESG compliance issues and legal cases against it.20 Irregular ratings given by two private standard setters, namely, Sustainalytics and RepRisk to Bank of America also highlight the risks associated with disclosure regimes which are voluntary and private. Bank of America had a significant exposure related to ESG-related risks and securities and political loan scandals. While both the standard setters had taken into account these risks, the scorings they gave were significantly different. This is primarily because the interpretation or understanding of risks is different for different organisations.21
Rise in greenwashing claims
The rising consciousness amongst the consumers and investors of the issues surrounding climate change has made them demand that the companies in their portfolio or usage be more environmentally compliant. This significant increase in demand has made room for possibility of companies posing their products/services to be “greener” than they are, even generating altogether false claims at times. These false claims have been at the heart of rising litigation against leading corporations. It goes to show that unless these gaps are supplemented, there will always be room for exploitation.
Supply chain issues are likely to play a growing role in ESG litigation that is not related to climate change in 2022. Furthermore, greenwashing claims (from regulators, shareholders, and other stakeholders) may increase as green marketing and ESG commitments become more important to consumers and investors. Climate change litigation will continue to develop in scope, as public and private entities face increased scrutiny for their role in financing high-emitting companies and/or infrastructure projects, and whether such financing aligns with their publicly stated commitments.22
The US Supreme Court in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System23 held that generic SEC disclosures such as commitment to ethics or touting “extensive procedures and controls” to identify conflicts of interest could be a ground to initiate action against the company. The investors in this case had claimed that the generic statements made by the company in reference to its compliance and commitment initiatives were misleading and were revealed later through conflicted transactions which had resulted in a steep drop in stock price. The case has been remanded back to the District Court by the United States Supreme Court and is still pending. However, the Court has once again certified the class of plaintiffs and allowed the case to proceed as a class action suit. The understanding to develop here is that the companies need to be more mindful of their ESG claims being vague and aspirational.24
In the year 2018 Nestlé released a press statement claiming to reduce plastic in its packaging by 100% by 2025.25 The same was challenged by Greenpeace organisation which claimed that Nestlé’s statement on plastic packaging includes more of the same greenwashing baby steps to tackle a crisis it helped to create. It will not actually move the needle toward the reduction of single-use plastics in a meaningful way and sets an incredibly low standard as the largest food and beverage company in the world. It was also stated that the statement is full of ambiguous or non-existent targets, relies on “ambitions” to do better, and puts the responsibility on consumers rather than the company to clean up its own plastic pollution.26 The claims of Greenpeace were substantiated when Nestlé was named as the biggest plastic polluter in the world along with Coca-cola and PepsiCo in a Brand Audit Report 2020 generated by the Break Free from Plastic Organisation.27
Starbucks, in the year 2018 launched their new “strawless lids” insinuating that the same would reduce the usage of plastic. It was however, found that such lids used round about the same amount of plastic as the previous lid and straw combination. It was further found that the recyclable material that they allegedly used to make their lids did not actually make much difference as only 9% of the world’s plastic gets recycled.28 It is also pertinent to note that United States especially outsources a large chunk of its plastic garbage disposal to poorer countries, who more often than not dump it right back into the ocean.29
In April 2022 charges were levied on Vale SA, a large iron ore producer and a publicly traded Brazilian company for making claims that were incorrect and misleading the public about its dam’s safety prior to the collapse of the Brumadinho dam in January 2019. Around 270 people died due to the collapse and resulted in extensive environmental harm as well. Vale incurred huge losses in its market capitalisation amounting to more than $4 billion.30 It had been alleged by the SEC in its complaint that Vale had existing knowledge that the dam did not meet the international standards in reference to safety of dams and was built to contain byproducts from mining operations that could have been potentially toxic in nature.31 However, the company in its sustainability reports as well as other public filing had given misleading assurance to investors that they had complied with the strictest international practices while evaluating dam safety and went to the extent of saying that all of its dams were in a stable condition.32
In May 2022, one of the largest producers of petroleum products in the world, ExxonMobil, was sued in the State of California over their false claims of “advanced recycling” which has not yielded any results in reducing plastic waste from the world. It is claimed in this litigation that the whole concept of “advanced recycling” was introduced by oil manufacturers and chemical companies to deceptively appear to be doing revolutionary research and development in the field of plastic waste management, while actually doing little in the field.33
It is clear that while the voluntary reporting mechanism is rife with gaps that are exploited by managers/directors to maximise their personal gain. It is thus necessary that to ensure the reliability of the data and claims published by the companies is subject to review by a State regulatory authority.
Examining the interaction of State actors with the existing voluntary ESG disclosure framework
State actors play a monumental role in determining quality and quantity of ESG disclosures of a corporation. Even if the disclosure is completely voluntary, the different standards are given importance by different agencies who undertake the task of ESG reporting. The standards vary with factors such as who is the end-user of this information (investor or consumer), what is the scope of data collection and implication, content to focus on (benchmarks used for different ESG issues) and even the method of data collection and analysis. These standards are even subject to change with the passage of time, meaning that the data collected for one year may or may not be comparable to the other years’ data making it very difficult to draw a trajectory of company’s ESG policies and their impact.
Most governmental authorities today are trying to formulate a framework under which they can ensure corporate accountability, protection of interest of investors and to meet their sustainability targets. In this section of the paper, we will see the scope of ways in which such framework incorporates the presence of existing structure of ESG disclosure mechanism which has been set up by the market, corporations themselves or independent third-party actors into it. We shall then look at examples of different jurisdictions where such incorporations respectively taken place and find out the gaps, if any, giving rise to greenwashing claims and how such gaps can be filled.
Different jurisdictions across the globe interact with the existing ESG disclosure laws in different ways, depending upon how incentivised the State actors of such jurisdiction are to apply the force of State behind the idea surrounding the ESG disclosure laws. The degree of power exerted by public authorities when they interact with the existing ESG disclosure regimes (whether developed by specialised third-party firms or by the companies themselves) may vary depending upon many factors. These factors include the allocation of resources to such regimes, the degree of supervision that State is willing to exert on framing and operation of the rules/standards so established, the political will to do so and creating an ecosystem in favour of such regimes by incentivising the participants and inviting other interested parties to partake in rule-making process.34
Depending upon the increase in this willingness the strength of the regulation increases and thus determines what would the interaction of such regulation with the pre-existing structures. These interactions can be in the following ways: deference, support, partnership, delegation, mandating and displacement.35 At the outset it should be noted that most jurisdictions choose a blend of all these ways to advance desired policy goals. These interactions are explained below in detail.
The weakest use of force by a State is achieved by actively or passively deferring the ordering to private entities of the market. If the State determines that the standards set out by the market are in line with its standards, it may actively refuse to create more regulations which would inhibit development of these standards on their own by the market. Passively, this can be done if the State refuses to interact or acknowledge the aspects included under the ESG reporting or by not engaging with the actors who produce such reports. There is also a chance that the regulating authority might consider that the actors being regulated are not homogeneous in their needs for regulation. Consequently, it is efficient to maintain two or more parallel regimes of regulation, with each regime designed to deal with the particular characteristics of a distinct set of actors36 which would recognise the value of industry standard towards a particular policy goal.
One of the notable jurisdictions where deference can be seen is Australia. The Australian Securities and Investment Commission (ASIC) encourages listed companies to use the TCFD recommendations as the primary framework for voluntary climate change-related disclosures. Listed companies reporting climate-related information under TCFD are expected to be well placed to transition to any future standard.37 A soft basis of these disclosures is found in Section 299-A(1)(c)38 which requires disclosure of material business risks affecting future prospects in an operating and financial review (OFR), risks which may include climate change.39
Even though it is not mandated by any specific law in Australia, ASIC has recommended that directors should develop their climate disclosure practices based on the following recommendations:
(A) considering climate risk;
(B) strong and effective corporate governance;
(C) comply with the law; and
(D) disclose useful information to investors.40
It is also important to observe that both Australian Securities and Investments Commission (ASIC) and Australian Stock Exchange (ASX) follow the principle of “true to label” &madash; that the product name aligns with the underlying assets to combat greenwashing.41
Another example of such a setup is United States where the regulatory body, SEC does not have legal authority requiring the companies to submit ESG disclosures as part of their “non-financial” information. The SEC had in the year 2010 issued guidance regarding disclosure related to climate change.42 However, the 2010 Guidelines did not lay down any specific parameters or standards which were to be adhered to by the companies for their submission. The 2010 Guidance remains the main climate disclosure reporting guidance for public companies that the staff of the SEC has issued, because the permissible scope of reforms that can be brought in by the SEC is restricted by consideration of investor protection and whether such reform would be able to “promote efficiency, competition [,] and capital formation”.43 This interpretation makes the goals of SEC differ from the goals sought to be achieved by the ESG disclosure regimes.
This off-hand approach of the SEC has been exploited by many companies, such as Volkswagen, which it was found in the year 2015 installed a software in their vehicles that would identify the testing conditions and would turn over false data over the emissions from their vehicles.44
It is, however, important to note here that the SEC has recently introduced Climate Disclosure Rule Proposal in March 2022.45 The proposed rule’s aim is to improve the consistency and comparability of company-reported, climate-related risks. If passed this proposal would mandate ESG disclosure for the first time in the United States.46
State can also provide support to ESG reporting without making it mandatory by promotion of private ESG standards or by providing impetus to the regulatory frameworks which are embedded in private-public partnerships.47 This is achieved by the State in two ways:
(i) endorsing existing private ESG reporting standards48; and
(ii) facilitating the participants of private ESG disclosure reporting regimes, such as tax breaks, etc.49
South Africa is a classic example of a State where most of the private ESG disclosure reporting is supported by the State regulatory bodies. It is done under the King Code on Corporate Governance, a Code of Principles adopted in the year 1994 and now in its fourth iteration (the “King IV” passed in 2016) by the Institute of Directors in South Africa (IoDSA).50 King Code provides recommendations on fostering an ecosystem of sustainability and environmental performance. IoDSA, which primarily consists of private and independent members, bases its Code on two organising principles: integrated reporting as under the IIRC’s framework and “apply-and-explain”.51
Under the International Integrated Reporting Council (IIRC’s) International <IR> Framework, integrated reporting seeks to integrate ESG disclosure with financial information. The IoDSA has a governing body which has the discretion to determine if the disclosures as required by the King Code have been made out by a particular company or not.52
Under “apply-and-explain” an organisation must apply all principles of the Code which substantiate that good governance is being practiced in the company. The explanation for these applications should be with reference to the practices that show how these principles are being applied.53 South Africa is the first country to implement apply-and-explain as an organising principle for its non-financial reporting.54
State regulatory authorities may decide to collaboratively develop rules or incorporate standards set out by private reporting into law. Such partnerships provide the State authorities with access to an already developed structure and an opportunity to modify them according to their conditions. For example, there are many States trying to develop reporting standards in collaboration with Global Reporting Initiative (GRI) or International Capital Market Association (ICMA) standards.
In Brazil, the private reporting is monitored by B3 (Brasil, Bolsa, Balcão), the largest stock exchange in the country. The Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários, or “CVM”) provides B3 the authority to do so.55 In 2011, B3 established a voluntary report-and-explain mechanism, under which companies trading their stocks on it were asked to disclose whether they had included ESG disclosures in their sustainability report or integrated report. Alternatively, they were to explain why they had not published such a report.56 This disclosure regime was developed by B3 in association with GRI and the IIRC.57
Additionally, B3 partnered with the CVM, the GRI and the UN Global Compact to develop guidance on ESG-related disclosure in a reference form that CVM provides to issuers. The reference form is like any other capital market regulating document that serves as a template for mandatory reporting which has to be undertaken at least annually.58 Thus, the ability of B3 to formulate their disclosure regime in partnership with GRI and IIRC and the support given by CVM to B3 points that Brazil is a model for both support and partnership arrangement of State interaction with voluntary disclosure regimes.
State Governments can in certain cases formally delegate their tasks of standard setting, monitoring, etc. to private entities, which are in turn monitored either directly by the regulatory body of State or indirectly through a private self-regulatory organisation (SRO).59 The key difference here from that of deference is that there is still a base standard set out by the public regulatory authority. The delegation to the third party is done so that the collaboration may result in easing the burden on State machinery to check every single participant. Public regulation may serve as a default or fallback option if a private governance regime fails to meet a legally established minimum threshold.60
To understand how delegation functions in practical sense we go back to our example of South Africa. As we have observed above the ESG disclosure regime in South Africa is governed by a soft law of King Code. This soft law is backed by the Johannesburg Stock Exchange (JSE), which requires compliance with the King Code as a mandatory requirement for the companies to be listed on the JSE.61
The JSE, as defined in Financial Markets Act 19 of 201262, is a market infrastructure, operating as an SRO supervised by the South African Financial Services Board (FSB)63 up until its dissolution in year 2018 when regulatory landscape changed to implement twin peaks model of oversight.64 The new model transfers the prudential decisions to South African Reserve Bank, Central Bank of South Africa and the market regulation has been transferred to Financial Sector Conduct Authority.65
In cases where the State Governments are keen to regulate the ESG disclosure framework in the market, they may adopt their own standards which may or may not be derived from existing market standards.66 In this model the Government defines the minimum standard by including it in its legal framework. The usage of “meta-regulation” is another form of mandating that Governments use to regulate the private regulators instead of bringing in standards on their own. For instance, a private reporting regime could be asked to meet minimum threshold requirements before the market can use it.67
The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations, 2022and Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations, 2022 are the two recently passed legislations in the United Kingdom under which certain companies are required to provide climate-related financial disclosures in their strategic report. The two legislations were brought before UK Parliament in January 2022 and are to come into force from 6-4-2022.68
Under the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022, the requirement applies to traded companies, banking companies, authorised insurance companies and companies carrying on insurance business and companies which in each case satisfy conditions as given below:
(a) companies that have more than 500 employees [as per Section 414-CA(4)69 as applied by Section 414-CA(1B)] and have transferrable securities admitted to trading on a market regulated by the United Kingdom;
(b) companies that are traded on alternative investment market (AIM), which is a special unit of London Stock Exchange catering to smaller markets; and
(c) a high turn-over company (companies that have turnover of more than £500 million.70
The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations, 2022 mandates climate related financial disclosures for limited liability partnerships which have more than 500 employees and an annual turnover of more than £500 million.71
It is noteworthy that these legislations do not just mandate the climate-Related financial disclosures but also define what would be included in such disclosures. The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations, 2022 in Section 414-CB (2A) describes what comes under the scope of “climate-related financial disclosures”.72
If we look closely, we find that the information sought under the above law manages to corelate to the four pillars of the Task-Force on Climate-Related Financial Disclosure (TCFD) recommendations of business governance, risk assessment, strategy and target and metrics. Under these two acts the companies and LLPs in UK will have to disclose their climate related risks and opportunities which are material for their business; they will also have to disclose the governance and management approaches to those risks; disclose the estimated impact these risks shall have on their business model and strategy and the target and performance benchmarks it uses to manage them.73
Existing private reporting regimes can also be displaced if the State Government chooses to bring in their own ESG disclosure standards. Theoretically, the State can even go to the extent of rejecting private reporting in its entirety.74 As we have seen SEC and other regulators in different jurisdictions becoming active, it will not be surprising to see them giving stiff competition to the private regulators by bringing in force their own mandatory disclosures.
If we consider the example of United Kingdom again, we find that the prior to the aforementioned Climate-related Financial Disclosure Regulations, the earlier corporate governance reforms that promoted these principles stemmed in the year 2006. It was then that the Section 17275 of the Companies Act included stakeholder’s interest and companies’ long-term goals under the ambit of fiduciary duties of the director. This is also known as the “enlightened shareholder value” model.76 So, in a manner the earlier regime of largely private ordering was displaced by the redefinition of the fiduciary duties of the director in the year 2006 and making the practice compulsory for listed companies.
It has become clear that the system of private ordering alone cannot be trusted, as the goals of individuals who oversee such private reporting may differ from the sustainable development goals that the market is in dire need of today. It is imperative that the State Governments intervene at this stage and apply the force and resources that are unique to sovereign authorities to prevent exploitation of the stakeholder’s interest. As we can see, through a healthy balance of private ordering with well drafted, target-setting regulations, a lot can be achieved in the sphere of ESG disclosure. Regulations backed by the sovereign authority of the State which are drafted considering the prevalent market practices, ensure that there are lesser number of loopholes and even lesser chance of exploitation by the parties involved.
In an example from 2021, shareholders in a major Australian Bank successfully sought access to its non-public records pursuant to shareholders’ books and records inspection right under the Corporations Act. The shareholders sought access to the records to determine whether the Bank’s decisions to finance significant oil and gas projects were consistent with its sustainable lending policies. This may be the beginning of a trend involving activists litigating directors’ duties or securities law claims to expose corporate greenwashing and hold corporate managers accountable for their ESG decision-making. This is potentially an area of vulnerability for corporations that are grappling with evolving ESG disclosure standards and the challenge of explaining how they are adapting their business models to a low carbon economy.77 This goes to show how far actions taken by the State in this field can protect the interest of the stakeholders.
From the research into the non-uniform realm of private ordering, we also found that there is a huge disparity in ESG disclosure laws across jurisdictions. It becomes clear that such disparity also presents opportunities for the violators to find a more suitable regime for their need of profit creation. Such practices only move the problem around and do not solve it. This sentiment was also echoed in an open letter issued by the We Mean Business Coalition, a group of sustainable business and investment-focused organisations including Business for Social Responsibility (BSR), Carbon Disclosure Project (CDP), Coalition for Environmentally Responsible Economies (Ceres), Corporate Leaders Groups (CLG) Europe, Climate Group, The B Team, and World Business Council for Sustainable Development (WBCSD).78 Such an alignment would be cost efficient, transparent, and accountable for corporate climate reporting.
It is no doubt that the discussion about ESG as a factor in investing has grown exponentially in the last few years. We have seen that the present regimes of voluntary private ordering of ESG disclosures are rife with loopholes and shortcomings which are part of its inherent design. We also saw how corporations/directors/managers across the world are able to manipulate these shortcomings by indulging in practices such as data dumping, vague claims, inconsistent reporting, etc. to take undue benefit of this rise in interest in sustainable investing.
It has become clear that the system of private ordering alone cannot be trusted, as the goals of individuals who are in charge of such private reporting may differ from the sustainable development goals that the market is in dire need of today. It is imperative that the State Governments intervene at this stage and apply the force and resources that are unique to sovereign authorities so as to prevent exploitation of the stakeholder’s interest.
We saw the different ways in which the State actors can interact with the existing form of voluntary private ordering as per the need and will of such State actors. We also saw that a balanced approach of private regulations in the market backed by scientific and robust State regulations are the best way to ensure that quantifiable targets are achieved in the field of sustainable finance. The UK’s climate-related financial disclosure laws are a milestone in ensuring that the corporations take the matter of sustainability much more seriously and follow through on their commitments to the stakeholders. It is also notable that the UK laws prescribe the scope of such climate-related financial disclosure and also provide a mechanism to review these laws periodically, bringing much required dynamism into our approach of sustainability. The importance of this system that learns and is open to change cannot be overstated as the problem that we face is also dynamic and ever-changing.
It also needs to be stated that for the sustainable market experiment to thrive and actually meet its end goal, it is also desirable that there is at least some, basic, uniform standard setting that is not only acceptable but also enforceable across the jurisdictions. As the goals enshrined under the Paris Agreement and the United Nations Sustainable Development Goals are global in nature, the actions of one part of the world are sure to affect others, making it as the old adage goes, “as strong as the weakest link in the chain”.
†Advocate, Supreme Court of India (LLM Candidate at Melbourne Law School). Author can be reached at firstname.lastname@example.org.
††Business & Human Rights Lawyer (LLM Graduate from University of Washington School of Law). Author can be reached at email@example.com.
1. The Social Role of Corporations in Asia Pacific (usali.org).
2. “The Turning Point: A Global Summary” (www2.deloitte.com, May 2022), p. 4.
3. R. Boffo and R. Patalano, “ESG Investing: Practices, Progress and Challenges” (oecd.org, 2020) p. 6.
4. Karen Maley, “So Just How Big a Problem is Greenwashing?” (afr.com, 1-6-2022).
5. R. Boffo and R. Patalano, “ESG Investing: Practices, Progress and Challenges” (oecd.org, 2020).
7. “ESG Reporting Issues and Securities Litigation Risk” (cliffordchance.com), p. 3.
8. “The Turning Point: A Global Summary” (www2.deloitte.com, May 2022), p. 4.
9. “SEC Charges BNY Mellon Investment Adviser for Misstatements and Omissions Concerning ESG Considerations” (sec.gov, 23-5-2022).
10. In the matter of BNY Mellon Investment Adviser, Inc., before the Securities and Exchange Commission (sec.gov, 23-5-2022).
11. Matthew Nelson, “Is Your Non-Financial Performance Revealing the True Value of Your Business to Investors?” (ey.com, 29-11-2017). According to surveys of institutional investors, 70 to 80 per cent consider ESG information as important or essential to investment analysis.
12. Iris H-Y Chiu, “Standardisation in Corporate Social Responsibility Reporting and a Universalist Concept of CSR? — A Path Paved with Good Intentions”, (2010) 22 FLA J. Int’l L. pp. 361-363; Virginia Harper Ho, “Non-Financial Risk Disclosure and the Costs of Private Ordering”, (2018) 55 Am. Bus. LJ 407.
13. “UN Global Compact, The Communication on Progress in Brief” (unglobalcompact.org).
14. Chris Ross, “ESG Claims in the Banking and Financial Markets Sector: Will ‘Greenwashing’ Claims Soon be Common in the UK?” (rpc.co.uk, 14-2-2022).
15. Virginia E. Harper Ho and Stephen Kim Park, “ESG Disclosure in Comparative Perspective: Optimising Private Ordering in Public Reporting”, 41 U. Pa. J. Int’l L. 249 (2019).
16. Recommendations of the Task Force on Climate-Related Financial Disclosures (fsb-tcfd.org).
17. Javier El-Hage, “Fixing ESG: Are Mandatory ESG Disclosures the Solution to Misleading ESG Ratings?”, 26 Fordham J. Corp. & Fin. L. 359 (2021), p. 369.
18. Javier El-Hage, “Fixing ESG: Are Mandatory ESG Disclosures the Solution to Misleading ESG Ratings?”, 26, Fordham J. Corp. & Fin. L. 359 (2021), p. 369.
19. Javier El-Hage, “Fixing ESG: Are Mandatory ESG Disclosures the Solution to Misleading ESG Ratings?”, 26, Fordham J. Corp. & Fin. L. 359 (2021), p. 369.
20. Javier El-Hage, “Fixing ESG: Are Mandatory ESG Disclosures the Solution to Misleading ESG Ratings?”, 26, Fordham J. Corp. & Fin. L. 359 (2021), p. 370.
21. Javier El-Hage, “Fixing ESG: Are Mandatory ESG Disclosures the Solution to Misleading ESG Ratings?”, 26 Fordham J. Corp. & Fin. L. 359 (2021), p. 370.
22. Paul Davies, Nicola Higgs, and Sophie Lamb, “Top Three ESG Legal Issues to Watch in 2022”, (corpgov.law.harvard.edu, 29-5-2022).
24. Rachel Goldman, Tom Kokalas, and Tim Wilkins, “More Focus on ESG Means More Scrutiny, Litigation and Enforcement, Too” (corporatecomplianceinsights.com, 1-3-2022).
25. Nestlé Aiming at 100% Recyclable or Reusable Packaging by 2025 (nestle.com, 10-4-2018).
26. Perry Wheeler, “Nestlé Misses the Mark with Statement on Tackling its Single-Use Plastics Problem” (greenpeace.org, 10-4-2018).
27. Brand Audit Report (breakfreefromplastic.org).
28. “Only 9% of the World’s Plastic is Recycled”, The Economist (economist.com, 6-3-2018).
29. “Where Does Your Plastic Go? Global Investigation Reveals America’s Dirty Secrets”, The Guardian (theguardian.com, 17-6-2019).
30. “SEC Charges Brazilian Mining Company with Misleading Investors about Safety Prior to Deadly Dam Collapse” (sec.gov, 28-4-2022).
31. “SEC Charges Brazilian Mining Company with Misleading Investors about Safety Prior to Deadly Dam Collapse” (sec.gov, 28-4-2022).
32. “SEC Charges Brazilian Mining Company with Misleading Investors about Safety Prior to Deadly Dam Collapse” (sec.gov, 28-4-2022).
33. Amy Westervelt, “Exxon Doubles Down on ‘Advanced Recycling’ Claims that Yield Few Results”, The Guardian (theguardian.com, 11-5-2022).
34. Jette Steen Knudsen and Jeremy Moon, Visible Hands: Government Regulation and International Business Responsibility, (1st Edn., Cambridge University Press, 2019) pp. 47-49.
35. Virginia Harper Ho and Stephen Kim Park, “ESG Disclosure in Comparative Perspective: Optimising Private Ordering in Public Reporting”, 41 U. Pa. J. Int’l L. 249 (2019), p. 277.
36. Ronald J; Hansmann, Henry; Pargendler, Mariana, 2011, Stanford Law Review, p. 480 — explaining regulatory diversification Ronald J. Gilson, Henry Hansmann and Mariana Pargendler, “Regulatory Dualism as a Development Strategy: Corporate Reform in Brazil, the US, and the EU, 63 Stanford Law Review 475 (2011).
37. “ASIC Welcomes New International Sustainability Standards Board and Updated Climate-Related Disclosure Guidance” (asic.gov.au).
39. “Effective Disclosure in an Operating and Financial Review, Regulatory Guide 247 (asic.gov.au).
40. Climate Risk Disclosure by Australia’s Listed Companies, Report 593 (asic.gov.au).
41. “ASIC Tells Fund Managers to be ‘True-to-Label’ ” (asic.gov.au, 22-9-2020); John Collett, “ASX Cracks Down on Ethical Fund Greenwashing” (smh.com, 25-5-2022).
42. Securities and Exchange Commission (sec.org).
43. Virginia Harper Ho and Stephen Kim Park, “ESG Disclosure in Comparative Perspective: Optimising Private Ordering in Public Reporting”, 41 U. Pa. J. Int’l L. 249 (2019), p. 293.
44. Russell Hotten, “Volkswagen: The Scandal Explained” (bbc.com, 10-12-2015).
45. “Enhancement and Standardisation of Climate-Related Disclosures” (sec.gov).
46. “ESG Regulations: US SEC Proposes Major New Climate Disclosure Requirements” (goldmansachs.com).
47. See Orly Lobel, “The Renew Deal: The Fall of Regulation and the Rise of Governance in Contemporary Legal Thought”, 89 Minn. L. Rev. 342, 344 (2004). Characterising new governance as “a more participatory and collaborative model, in which Government, industry, and society share responsibility for achieving policy goals”.
48. Tom Fox, Halina Ward and Bruce Howard “Public Sector Roles in Strengthening Corporate Social Responsibility: A Baseline Study” (pubs.iied.org, 10-2022).
49. Virginia Harper Ho and Stephen Kim Park, “ESG Disclosure in Comparative Perspective: Optimising Private Ordering in Public Reporting”, 41 U. Pa. J. Int’l L. 249 (2019), p. 294.
50. Institute of Directors in South Africa, King IV: Report on Corporate Governance for South Africa, 2016 (1-11-2016).
51. Virginia Harper Ho and Stephen Kim Park, “ESG Disclosure in Comparative Perspective: Optimising Private Ordering in Public Reporting”, 41 U. Pa. J. Int’l L. 249 (2019), pp. 296-297.
52. Virginia Harper Ho and Stephen Kim Park, “ESG Disclosure in Comparative Perspective: Optimising Private Ordering in Public Reporting”, 41 U. Pa. J. Int’l L. 249 (2019), pp. 296-297.
53. Institute of Directors in South Africa, King IV: Report on Corporate Governance for South Africa, 2016 (1-11-2016) p. 41.
54. Virginia Harper Ho and Stephen Kim Park, “ESG Disclosure in Comparative Perspective: Optimising Private Ordering in Public Reporting”, 41 U. Pa. J. Int’l L. 249 (2019), pp. 296-297.
55. United Nations Sustainable Stock Initiative (sseinitiative.org).
56. “New Value-Corporate Sustainability Guide” (b3.com).
57. “New Value-Corporate Sustainability Guide” (b3.com).
58. United Nations Sustainability Stock Initiative (sseinitiative.org).
59. Roberta S. Karmel and Claire R. Kelly, “The Hardening of Soft Law in Securities Regulation”, 34 Brook. J. Int’l L. 884, 884 (2009). The criteria or conditions on such delegation are a form of meta-regulation, which represents a regulatory mandate, see infra notes 154-156 and accompanying text.
60. David M. Trubek and Louise G. Trubek “New Governance and Legal Regulation: Complementarity, Rivalry, and Transformation”, 13 Colum. J. Eur. L. 539, 549 (2007).
61. JSE Limited Listings Requirements, Para 8.63(a) (jse.co.za).
62. Financial Markets Act, 2012.
63. JSE Board SRO Oversight Committee, Terms of Reference (jse.co.za).
64. Sustainable Stock Exchange Initiative (sseinitiative.org).
65. Financial Sector Conduct Authority, <https://www.fsca.co.za/Pages/About-Us.aspx#:~:text=The%20Financial%20Sector%20Conduct%20Authority,market%20conduct%20regulation%20and%20supervision>.
66. Tom Fox, Halina Ward and Bruce Howard, “Public Sector Roles in Strengthening Corporate Social Responsibility: A Baseline Study” (pubs.iied.org, October 2022). p. 3.
67. Al-Tawil, Tareq Na’el and Younies, Hassan “Corporate Governance: On the Crossroads of Meta-Regulation and Social Responsibility”, (2020) Journal of Financial Crime.
68. Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations, 2022.
69. Companies Act, 2006, S. 414-CA(4).
70. Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations, 2022.
71. Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations, 2022.
72. Tom Fox, Halina Ward and Bruce Howard, “Public Sector Roles in Strengthening Corporate Social Responsibility: A Baseline Study” (pubs.iied.org, October2022), p. 3.
73. Explanatory Memorandum to the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations, 2022.
74. Margaret Ryznar and Karen E. Woody, “A Framework on Mandating Versus Incentivising Corporate Social Responsibility”, 98(74) Marq. L. Rev. 1667, 1673 (2015).
76. Taskin Iqbal, The Enlightened Shareholder Value Principle and Corporate Social Responsibility, (1st Edn., Routledge, London 2021) p. 56.
77. Jennifer G. Hill and Tim Bowley, “Australia: Fast-Growing Awareness and Activism, Symposium on the Social Role of Corporations in Asia-Pacific”, (usali.org, 17-3-2022).
78. Mark Segal, “Regulators, Standard Setters Urged to Align ESG Reporting Initiatives” (esgtoday.com, 19-5-2022).