ESG, or the incorporation of environmental, social, and governance factors into business decisions and management, is in the news no matter where you look. Long viewed as a positive force among forward-looking corporations and broader society, ESG has recently faced one of its most significant bouts of criticism, generating questions about what it may look like in the future.

At a time of growing political polarization in both North America and Europe, criticism of ESG is growing louder from some segments of society. Some of the most pointed criticism is not about companies’ actual sustainability initiatives, but about how companies communicate those ESG-related efforts to stakeholders through disclosures and sustainability reports as well as in advertisements and other general public communications.

The reasons for - and objectives of - this type of criticism are clustered around two opposing extremes. On one hand, growing concerns over greenwashing are leading authorities to clamp down on companies exaggerating their ESG credentials. On the other, backlash against ESG is also emerging over accusations that companies are putting politics over profits. Amid fears that this backlash will chill corporate ESG disclosure and action, a new term known as “greenhushing” has entered the sustainability lexicon, as companies scale back ESG-related communications or activities to avoid the risk of being dragged into politicized debate and legal scrutiny.

Backlash and Greenhushing: Roadblocks to Action and Disclosure

While ESG is now a global phenomenon, most criticism leveled at it is occurring in the politically polarized United States where Republican-dominated states are taking issue with the concept. This is particularly true as it ventures into some of today’s most contentious topics in America like climate action and workplace diversity, equity, and inclusion. The state of Florida has been at the forefront of ESG backlash. Within the past six months, Florida’s Chief Financial Officer announced the state would divest $2 billion in assets from BlackRock over the asset manager’s ESG initiatives, and the state’s governor proposed legislation that would ban the use of ESG factors in state and local investment decisions. Kentucky, Texas, Utah, and West Virginia have also passed laws restricting the use of ESG factors in state and local investment decisions or requiring state divestment from financial sector corporations that incorporate ESG factors in investing decisions. While the bulk of this anti-ESG activity has taken place in the U.S., the global nature of investing means that companies around the world will need to take notice.

While the validity of this ESG backlash is debatable, what is not is the potentially chilling effect it may have on corporate ESG action and disclosure. If a company decides not to disclose its internal sustainability goals or projects or declines to publicize its progress towards goals it has already set, that would be considered greenhushing. Although there are few directly attributable instances of greenhushing, some U.S. financial institutions are already noting in their annual reports that ESG backlash could negatively affect their financial performance.

Greenwashing: When overstatement backfires

ESG grew in prominence in recent years after major corporations like Blackrock (who in 2018 published its approach to integrating ESG data and information into their organization) took steps to align their businesses with stakeholder-focused principles. While most large companies now pursue ESG in some way, whether through setting ESG targets, establishing ESG risk management practices, etc., questions are now emerging over if companies are overstating their ESG actions. Although not all these overstatements are made with deception in mind, the fact that they are happening is drawing regulatory attention to the authenticity of ESG initiatives. In one of the most notable examples, German authorities raided Deutsche Bank and its DWS asset management subsidiary last May over whistleblower allegations that the companies were exaggerating the ESG credentials of their investment products. Regulators have also forced companies to walk back statements about sustainability practices that stray into greenwashing territory. In the UK, for example, the Advertising Standards Authority (ASA) banned ads highlighting HSBC’s investments in helping its clients transition to net zero for failing to acknowledge the bank’s continued financing of emissions intensive industries.

Because of these cases, and other similar greenwashing accusations, regulators are establishing guidelines intended to curtail companies’ ability to mislead by greenwashing. In February, the ASA published guidance for companies making environmental-related claims in advertisements, which includes recommendations to qualify carbon neutral and net zero claims, among others. And in March, the European Union (EU) proposed rules that would require companies to independently verify the accuracy of their environmental claims and provide information on their verification either physically on a product or digitally.

How Forthcoming Disclosure Standards Can Make ESG More Robust

Greenwashing and greenhushing both have the potential to hinder corporate enthusiasm for ESG-related initiatives and actions, or at least make companies hesitate about full disclosure. As these dueling pressures potentially gain in strength, several forthcoming ESG-related disclosure standards are also on the horizon. Over the next few months, the SustainAbility Institute by ERM will publish disclosure briefings on the Taskforce on Nature-related Financial Disclosures (TNFD) and the EU’s Corporate Sustainability Reporting Directive (CSRD). In the future, we will also publish a disclosure briefing on the U.S. Securities and Exchange Commission’s (SEC) proposed Climate-related Disclosure Rule after the final rule is released. While these briefings will explore what these disclosure standards require and what they mean for companies’ ESG disclosure efforts, they can also help companies manage ESG pressures now.

There are four main areas where these three disclosure standards can bolster the credibility of corporate ESG initiatives.

1. Communicating Risk

Communicating financial risk is common practice among companies. Many companies are also increasingly communicating sustainability-related risk in response to stakeholder demands for this information. As they do, opportunities to combat ESG criticism are arising. Sustainability-related risk disclosure presents an opening for companies to be forthcoming about these risks, a move that is likely to generate reputational benefits among stakeholders concerned about companies only promoting the benefits generated by their ESG initiatives. Similarly, sustainability-related risk disclosure can help companies demonstrate that ESG initiatives are not responses to political pressures but rather responses to actual risks that are likely to impact their bottom lines.

Connections to Disclosure Standards
The TNFD will direct interested companies to disclose:

  • Process for identifying and assessing nature-related dependencies, impacts, risks, and opportunities in their direct operations, value chains, and financed activities and assets.
  • Nature-related dependencies, impacts, risks, and opportunities over the short- medium-, and long-term.
  • Processes for managing nature-related dependencies, impacts, risks, and opportunities, actions taken, and how this process is integrated into their overall risk management.

The Climate-related Disclosure Rule may require SEC registrants to disclose:

  • How they identify, assess, and manage climate-related risks and whether these processes are integrated into their overall risk management system.
  • How identified climate-related risks have or are likely to have a material impact on their business and financial performance in the short-, medium-, and long-term.
  • If they use a transition plan as part of their climate-related risk management and if they do, the metrics and targets they use to identify and mange physical and transition risks.

The CSRD will require large companies based in, or operating in, the EU to disclose:

  • Their principal risks related to sustainability matters (i.e., environmental, social and human rights, and governance factors) and their dependencies on these matters.
  • How they manage their principal risks related to sustainability matters.


2. Outlining Strategy

Outlining an ESG strategy is key to protecting against greenwashing and greenhushing risks. For example, companies need to establish clear connections between their ESG actions and their overall financial success by disclosing how they incorporate ESG risks and opportunities (and their associated management approaches) into their broader business strategy. By doing so, they are more likely to alleviate concerns that they are using ESG for strictly publicity purposes and that ESG is a key component of financial success, not a political machination.

Connections to Disclosure Standards
The TNFD will direct interested companies to disclose:

  • The effect of nature-related risks and opportunities on their business, strategy, and financial planning.
  • The resilience of their nature-related risks and opportunities strategy and if they accounts for different scenarios.

The Climate-related Disclosure Rule may require SEC registrants to disclose:

  • How identified climate-related risks have affected or are likely to affect their strategy, business model, and outlook.
  • If they use scenario analysis to assess the resilience of their strategy to climate-related risks.

The CSRD will require large companies based in, or operating in, the EU to disclose:

  • Information on the resilience of their business model and strategy to risks related to sustainability matters.
  • Information on how their business model and strategy “has been implemented with regard to sustainability matters.”


3. Disclosing Targets and Progress

Companies are facing scrutiny for setting ambitious ESG targets without first establishing plans to achieve them and for setting ESG targets in the first place over concerns that they will limit their financial performance. To help alleviate this scrutiny, companies should provide detailed disclosures of these targets and their progress toward them to ensure their stakeholders are confident that they are achievable and will not negatively impact their overall business success.

Connections to Disclosure Standards
The TNFD will direct interested companies to disclose:

  • The targets they use to manage nature-related dependencies, impacts, risks, and opportunities and their performance against them.

The Climate-related Disclosure Rule may require SEC registrants to disclose:

  • The scope of their activities and emissions covered by their climate-related targets, the targets’ time horizons, and any interim targets they may set.
  • How they plan to meet their climate-related targets.
  • Data indicating if they are making progress toward meeting their climate-related targets and how much progress they have made.

The CSRD will require large companies based in, or operating in, the EU to:

  • Disclose their targets related to sustainability matters and their progress towards achieving them.
  • Disclose whether their environmental-related targets “are based on conclusive scientific evidence.”


4. Defining Governance

As ESG faces growing pressure, defining and disclosing an ESG governance structure is crucial to the success of companies’ ESG initiatives. Why? Like more traditional corporate governance, an ESG governance structure will help ensure confidence in a company’s ESG actions by demonstrating a defined oversight process for ESG-related decisions. This confidence can in turn assuage concerns that a company may use greenwashing to generate a competitive advantage and bolster the credibility of ESG initiatives whose value might otherwise be questioned.

Connections to Disclosure Standards
The TNFD will direct interested companies to disclose:

  • Board and management oversight of nature-related dependencies, impacts, risks, and opportunities.

The Climate-related Disclosure Rule may require SEC registrants to disclose:

  • The role of their Board and management in overseeing and governing climate-related risks.

The CSRD will require large companies based in, or operating in, the EU to disclose:

  • The role of governance bodies in overseeing sustainability matters.
  • The sustainability-related related expertise and skills of members of governance bodies or the access these bodies have to such expertise and skills.

ESG at a Crossroads

ESG stands at a crossroads. For the first time, the concept faces significant criticism over concerns of exaggeration and the mixing of politics and business. Though each critique emerged from divergent viewpoints, both strands have implications for companies, whether they be greenwashing enforcement actions and regulations or political pressures to scale back ESG initiatives. While the criticism of corporate and investor ESG approaches is unlikely to abate soon, its future should not be in doubt as emerging ESG disclosure standards help companies bolster their ESG credentials through transparent disclosures aimed at showing the value of their ESG actions.