Join Sphera Chief Product Officer Mike Zamis and Sharlene Key, Sphera’s director of ESG product management, for a conversation on greenwashing. They look at why greenwashing happens, how regulations can be used to combat it and how standardized ESG metrics can help prevent it.
The following transcript was edited for style, length and clarity.
Sharlene Key:
Welcome to the SpheraNOW ESG podcast, a program focused on safety, sustainability and productivity topics. I’m Sharlene Key, director of ESG product management at Sphera. Today, we’re joined by Sphera’s chief product officer, Mike Zamis, who is responsible for the strategy and development of Sphera’s next generation ESG solutions, from carbon accounting to health and safety and risk management. Thank you for joining us on the podcast, Mike.
Mike Zamis:
Thanks, Sharlene. Great to be here.
Sharlene Key:
Greenwashing happens when businesses portray their products or services as being more environmentally friendly than they actually are, often for the sake of marketing and sales. Mike, you recently spoke on a panel at GreenFin that discussed greenwashing. Given the increased focus on ESG and sustainability reporting, can you explain some of the factors that lead to greenwashing?
Mike Zamis:
When we think of greenwashing and what goes on in the marketplace, I put it in two different buckets. In the first bucket, charitably speaking, we see a lot of teams at companies who are overworked, understaffed, under equipped and they’re doing the absolute best they can to try to answer the questions around their company’s ESG and sustainability performance. Now, the challenge here is that they’ve got a hodgepodge of disparate data. They’re not sure how to bring it all together and inevitably, in the exchanging of Excel spreadsheets and posting on SharePoint, it gets to a point that something leaks out and it’s probably not what they wanted to say exactly. So, in the first group, we think about teams that are overworked.
In the other situation, there are no real rules around ESG. There’s lots of disclosure frameworks, and there’s lots of metrics that we can follow up on. Some companies, from a competitive point of view, feel that they need to really stretch their ESG credentials and / or their sustainability credentials. Sometimes you find companies going too far and really stepping outside of what they actually do, and that’s where you really get into greenwashing. It’s really two different situations: overstretched, understaffed groups doing the best they can with a hodgepodge of data and disclosure rules; and other groups that, from a marketing or competitive environment point of view, step over the line.
Sharlene Key:
That’s really interesting. Mike, are there some factors that are easier to control from a business perspective than others?
Mike Zamis:
Companies can always control their data. Now, whether they can get good data, that’s another question. One of the fundamental challenges we’re seeing in the marketplace is companies being able to operationalize this ESG data. How do we not make it a once-a-year data-collection exercise and actually embed it in our business operations that we execute every single day? Think of financial reporting. We don’t wait until the year end to see what the company financials are. Every day, every week, every month, every quarter, every year—we have financial professionals working against defined frameworks.
These are accredited professionals, who are then audited by third parties to make sure the data is correct. I think that is the same kind of environment we need in place in ESG and sustainability reporting to prevent greenwashing. We need regulations where everyone’s measured the same way against the same frameworks, where we have professionals who know how to report against ESG metrics, and then we need that audited. I think those three steps would go a long way toward preventing greenwashing.
Sharlene Key:
So, you mentioned disclosure frameworks earlier. The regulatory environment is changing quickly for ESG investing. What role do regulators play in combating greenwashing in the financial sector?
Mike Zamis:
When it comes to regulations, it’s to level the playing field. Today, there are multiple disclosure frameworks. There’s pretty deep flexibility in some of those frameworks and there are competing frameworks. There’s a real chance for companies to pick and choose what ESG means to them. As regulators get more serious and more focused on what makes good ESG and what those additional metrics are that every company should report on, that will start to coalesce these reporting results. With greater standardization of ESG metrics, it will become much easier to digest information and make intelligent decisions based on that information. This is an opportunity for regulators to transform the ESG markets through consistent, clear and effective rules.
Sharlene Key:
Since regulators play such a big role, do you feel they’re doing enough in the current environment, or should they be acting more quickly?
Mike Zamis:
Well, I think we’re starting to see that bubble up. The European Union has been way ahead of the rest of the world in terms of defining these things, whether it’s the SFDR or CSRD initiatives. We’re starting to see that filter into other regions. The U.K. is supporting TCFD, along with Japan and New Zealand and now, we’re seeing it trickle into the United States with the proposed SEC rule. We wish it was quicker. We wish it was faster. We wish, perhaps, it would be deeper to create some consistency in the markets. We are seeing different regulatory regimes and frameworks bubble up and drive changes in the marketplace, which I think are essential to having good, reliable, consistent, measurable and transparent ESG reporting.
Sharlene Key:
Well, it sounds like some exciting progress is being made. I know you touched on this a little bit earlier, but what can companies do to combat greenwashing? What processes should they be focusing on?
Mike Zamis:
I think ESG must really be part of what the company wants to achieve. It can’t be a marketing element. It belongs with ESG professionals, like the VP of sustainability or corporate sustainability officer. ESG needs to be built into operations and not treated as an add-on. It really needs to be embedded in what companies do every single day.
We need consistent regulatory frameworks so everyone’s measuring against the same set of rules or a defined set of rules. You need companies to be consistent and transparent over time with professionals who are reporting against those results, gathering and defining those reports much like we do in financial reporting. And then, finally, you need an audit function as well. You need a proven, trusted third party, like we have in financial reporting to come in and review the ESG metrics and give it a bill of health. Those are the key three things that need to be in place for people, investors, regulators and consumers to look at ESG reporting and treat it as a serious metric for them to make decisions about investments, what companies they’re going to support and things like that.
Sharlene Key:
With many financial companies having sales incentives that are not specifically ESG focused, how do you feel the updates and regulations are going to impact those organizations?
Mike Zamis:
There are a couple rules that the SEC is starting to put forward and they’re called the Names Rule and the ESG Impact Rule. It’s trying to get a little truth in advertising, relative to the fund composition. For example, on the Names Rule, if you’re an ESG fund, are you investing 80% of your funds in ESG-related items? You have to ensure you’re just not rebranding some other asset fund, value fund or growth fund and throwing ESG as a label on it.
Also, on the disclosure rules, those are ideas around whether you’re driving an impact, or whether it’s a factor in your decision-making around ESG investments in your investment strategy. This includes whether you are really trying to drive an ESG focus, where your whole fund is focused on ESG goals and initiatives, or whether it’s a very narrow impact where you’re picking and choosing companies to help drive that specific ESG impact goal. When you look at rules like those the SEC is putting forth, you’re seeing an effort to drive clarity and truth. If you’re selling funds, you’ll be guided by these rules and you’re going to have to be clear and honest and direct with those. Otherwise, your company runs the risk of incurring a fine or a penalty.
Sharlene Key:
During these disclosure processes, how important is intercompany communication?
Mike Zamis:
As you think about a financial firm launching a new financial product, they are going to need to label it correctly and talk about its composition correctly, and I think that’s the source of some of the new SEC regulations you see coming out.
There have been occurrences where old value or growth funds have been relabeled as ESG funds, and one might argue that they’re not ESG-focused in nature or in impact. What I think you’re going to see, as these rules make their way into regulations, is that the marketing department and the product department at some of these companies are going to have to come together and be clear on what the aims and goals and strategy of the funds really are. They need to be properly named and disclosed, so they’re not going to mislead anyone about the nature of the investment.
I think that’ll be another area of regulating ESG and the overall industry. Industries need to make sure that there’s truth in advertising and there’s clarity amongst the stakeholders, investors and shareholders so we get the right financial assets in the right hands.
Sharlene Key:
That’s very interesting, Mike. Thank you again for taking the time to speak with us today on the SpheraNOW ESG podcast.
Mike Zamis:
Thank you so much, Sharlene. As always, it’s great to be on the podcast. Look forward to the next one.
