Global watchdog proposes new ethics code to combat greenwashing

Firms that check environmental, social and governance claims made by companies will be asked to follow a proposed new ethics code to help combat greenwashing, the chief of a global standards body told Reuters.

Trillions of dollars have flowed into investment funds touting green credentials, but these can be misleading, a practice known as greenwashing. As a result, companies are increasingly being asked to disclose more about their actions on climate change and other issues such as board diversity.

Companies in the European Union and globally from this year will have to use new, mandatory disclosures on ESG and climate-related factors in their annual reports for 2024 and onwards.

These disclosures will need checking by external auditors as a safeguard against greenwashing.

Gabriela Figueiredo Dias, chair of the International Ethics Standards Board for Accountants (IESBA), said it was proposing revisions and additions to its ethics standards for auditing sustainability information from companies.

The IESBA is an independent global body that sets ethics standards for business and other organisations.

The standards spell out best practice for verifying a company's sustainability claims by offering detailed instructions in areas such as accounting for the impact of corporate actions on emissions, relying on outside experts, and identifying and tackling conflicts of interest.

"There is nothing more central to sustainable finance than the information that is provided to those who decide to invest or fund projects and businesses."

Dias said the proposed standards, which will be open for public consultation until May, would complement the development of new technical assurance standards from the International Auditing and Assurance Standards Board.

"Ethics is the baseline for the whole infrastructure. If you think about... greenwashing and misinformation, (it) always has behavioural issues at its root and not technical reporting reasons."

    "It's not because preparers and providers don't know what they have to report and assure, it's because there are ethical or independence issues such as conflicts of interest," she said, for example, financial interests, pressure from client companies or their management, inducements or a lack of competence.

Global securities watchdog IOSCO has encouraged the moves by IESBA to update its standards as climate related disclosures under mandatory rules, rather than private sector guidance, are rolled out, making enforcement against greenwashing easier.

IOSCO board Chair Jean-Paul Servais said he welcomed IESBA's action to call on issuers, investors and assurance providers to participate in the consultation.

"Trust in such disclosures will be enhanced when they receive external assurance based upon globally accepted standards regarding ethical behaviour and independence."

IESBA said the proposed new standards could also be used by firms other than professional accountants for auditing sustainability disclosures, such as consultants, engineers or lawyers, responsible for more than half of sustainability reports.

EU rules allows non-accounting firms to audit sustainability disclosures - which will be checked to a lower standard than financial statements - to provide competition for KPMG, EY, Deloitte and PwC, dubbed the Big Four who dominate corporate auditing.