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COMPANIES, GREENWASHING AND INDIA: A NOTE ON ESG INVESTING

Updated: Feb 10, 2023



Have you ever come across commercials and advertisements that use fancy terms such as “100% natural”, “completely organic”, or “eco-friendly” while canvassing for their products? You should have, and you might have even probably fallen for that. But have you ever spared a thought about what goes behind such undefined phrases with very unclear specifications that are provided completely in the dark? Have you ever considered the legitimacy of such credentials?


As reported by the Times of India, “a recent study finds that almost 60% of sustainability claims by certain fashion brands in India and their high-profile/so-called designer status could be classed as ‘unsubstantiated’ and ‘misleading’ and these numbers are going larger every season”. This is called ‘Greenwashing’. The Cambridge Dictionary defines it as the “behaviour or activities that make people believe that a company is doing more to protect the environment than it really is”, and at the most basic level, it happens at the intersection of two company behaviours - substandard environmental performance and affirmative communication about environmental performance to increase a firms’ profits-margin by attracting consumers through false or over-exaggerated claims of environmental soundness.


Greenwashing, or as the matter of fact, even Environment, Social and Governance (ESG) washing has become a subject of global concern today. The ESG rating practice, which depicts the sustainability of activities undertaken by firms with respect to their practices pertaining to their environment, social and governance aspects, though conceived with noble intentions, has lately become an instrument to deceive their investors to gain profits using the ‘green factor’.


The Greenwashed funds have been contaminating the market for a good while now, which have been greatly manipulating the informed decisions of the investors. The advent of ESG compliance policies has further propelled the scope of corporations to further their usage of ‘green labels’ and derive funds thereby. The absence of a proper legal regulatory framework to look after such activities has catalysed the corporates for their increased use of such ‘green labels’. When such is the case for an informed investor, the fate of an ordinary customer whose knowledge is merely limited to these labels could be imagined.


The issue could be further problematised with the fact that the current global ESG compliance standards are presently undefined. One could only derive a general understanding from the standards laid down by certain international organisations such as the United Nations Sustainable Development Group (UNSDG) and the International Organisation for Securities Commissions (IOSCO) alongside certain national-level compliance mechanisms. In the Indian context, unfortunately, there is no specific legislation to reign greenwashing; however, recently the Securities and Exchange Board of India (SEBI) constituted an advisory committee on ESG matters, where one of its terms of reference for ESG investments include - “Continuous enhancement of disclosures specific to ESG Schemes of Mutual Funds with particular focus on mitigation of risks of mis-selling and greenwashing”.


There are also certain guidelines for self-regulation for advertising such as the one by The Advertising Standards Council of India (ASCI), a voluntary self-regulatory organisation, which requires advertisements to be “legal, decent, honest and truthful”. Earlier, the United Nations has also constituted a High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities. However, all of these do not mandate any form of legislation upon the corporates, thus, making them non-binding towards any noble policy.


Therefore, it is high time to establish a regulatory framework in India to uphold the rights of the investors and even the common citizen to truthful information on their investments. Alongside the various definitive parameters for the qualification of a product or an entity for ESG compliance or their performances under those parameters, which are often held discreet from the public, must be made available to them. India must draw lessons from the U.S. Securities and Exchange Commission (SEC) in tackling such issues and take appropriate actions regarding the same. Let’s look into some of such actions by the SEC.


The SEC, in 2021, has launched a Climate and ESG Task Force within its Division of Enforcement to develop initiatives to proactively identify ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment. The Task Force claims that it is “coordinating the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations including material gaps or misstatements in issuers’ disclosure of climate risks under existing rules, and disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies”.


A few of the notable ESG-related enforcement actions of the SEC include the charging of:

➢ Investment adviser for misstatements and omissions concerning ESG considerations - BNY Mellon (2022)

➢ Brazilian mining company with misleading investors - Vale S.A. (2022)

➢ Sham environmentally-friendly bottling company - ECO Manufacturing (2021)

➢ Auto company that made misleading statements regarding emissions - Fiat/Chrysler (2020)

➢ Fraud regarding water desalination process - Bounty of the Ocean (2020)

➢ EB-5 scheme involving environmentally friendly agriculture and cleaning products production facility - PDC Capital (2018)

➢ EB-5 scheme involving recycling process - Green Box (2017)

➢ Pump-and-dump scheme involving revolutionising O&G production - Chimera Energy (2014)


Alongside these, a proper regulatory mechanism for ESG regulation will also be needed, primarily through standardising ESG-related disclosures. Currently, companies rely upon private third-party agencies for ESG quality ratings, which mostly work based on a few non-regulated self-established standards. While the SEBI has recently consulted on regulating such ESG rating providers, alongside its mandate for Business Responsibility and Sustainability Reporting (BRSR) for certain listed entities, and recognized Stock Exchanges, they still lack adequate supervision.


One of the only ways to tackle this is by making the disclosure obligations of the companies much more stringent. Blatant misrepresentations of the ESG compliance of companies must be made punishable through due process of law. While it would not guarantee investor protection, the availability of information would certainly enhance the decision-making power of the investors and would incentivise the companies to be more sincere with their ESG policies.

Therefore, as it is well understood that the absence of clear regulatory guidance and enforcement mechanisms and frameworks for standardised disclosures would free flow the risk of deceitful practices such as greenwashing, India must come up with needful legislation to make its economy resilient and environment sustainable, in reality.

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