Environmental, Social and Governance (ESG) is becoming an unstoppable force, influencing investor decisions and placing pressure on businesses of all sizes to take measurable action. Despite the proliferation of ESG efforts on the part of organizations and demands for metrics on the part of investors and consumers, there is a considerable gap between claims made and results presented.
The Securities and Exchange Commission (SEC) recently took action to crack down on false ESG claims with its first fine targeting BNY Mellon Investment Adviser, Inc. This concrete consequence for ESG falsification was the result of a whistleblower report, and organizations must increase scrutiny on the veracity of ESG claims to minimize internal risks and ensure there is no need for whistleblowing in the first place.
The missteps of major asset managers
Following an investigation by the SEC, BNY Mellon agreed to pay a $1.5 million penalty for actions taken from July 2018 to September 2021. The adviser implied or explicitly stated that certain mutual funds earmarked as ESG-friendly underwent a quality review and verification, while in reality that was not the case for multiple funds.
According to Sanjay Wadhwa, head of the SEC’s Climate and ESG Taskforce and Deputy Director of the SEC’s Division of Enforcement: “…BNY Mellon Investment Adviser did not always perform the ESG quality review that it disclosed using as part of its investment selection process for certain mutual funds it advised.”
ESG enforcement is ramping up outside the U.S. as well. Following a whistleblower report, German officials executed a raid on the offices of Deutsche Bank with the intention of uncovering fraudulent advertising related to ESG investments, with DWS maintaining the denial of wrongdoing.
Reuters has received reports from regulators in Switzerland, the Netherlands, Sweden, Britain and France of multiple instances of false or misleading ESG claims being uncovered in recent months. The French Financial Markets Authority has gone so far as to force organizations to drop their ESG labels in the wake of severe greenwashing.
The takeaway is that the rising tide of regulation is catalyzing increased whistleblowing. The SEC has awarded more than $1 billion to whistleblowers since 2011, and the confusion surrounding metrics matching up to claims drastically increases the incentive for employees to call out fraud or misstatements when they see them.
The current state of ESG transparency
Organizations wishing to stay on the right side of regulators and take whistleblowing off the table face significant challenges in data collection and analysis. Research from Deloitte sheds some light on the conundrum:
- 57% of senior executives surveyed list data availability, accuracy and completeness remain the most significant challenges in ESG disclosures.
- 82% of respondents believe additional resources will be required to provide adequate ESG disclosures.
- 92% of respondents believe their organization will need to increase technology investments to meet disclosure needs.
On top of this, just 21 percent of companies have an ESG working group or council in place to drive progress.
Leveraging available ESG technologies
As the Deloitte study clarifies, utilizing technology to produce robust reporting backing up ESG claims will be critical in withstanding the incoming waves of whistleblowers spurred on by regulators–yet doing it with the budget constraints most companies face can be a heavy lift.
A key element of the solution is to leverage off-the-shelf products with the option for customization. The SAI360 platform offers an ESG solution bundling management of risk, compliance, process, and third parties, paired with the metrics management and disclosures companies need to meet ESG goals and minimize the looming threat of whistleblowing as regulators become more aggressive.