Firms that assess environmental, social, and governance (ESG) claims made by companies will be required to adhere to a proposed ethics code aimed at combating greenwashing, according to the chief of a global standards body. The practice of greenwashing, which involves making misleading claims about green credentials, has drawn trillions of dollars into investment funds. To address this issue, companies are increasingly being urged to disclose more information about their actions related to climate change and other areas such as board diversity. Starting this year, companies in the EU and globally will be obligated to include new mandatory disclosures on ESG and climate-related factors in their annual reports from 2024 onwards. External auditors will be responsible for verifying these disclosures to prevent greenwashing.
The International Ethics Standards Board for Accountants (Iesba), an independent global body that establishes ethics standards for businesses and organizations, is proposing revisions and additions to its ethics standards for auditing sustainability information reported by companies. These proposed standards, open for public consultation until May, aim to complement the development of new technical assurance standards from the International Auditing and Assurance Standards Board. The proposed standards provide guidance on best practices for verifying a company’s sustainability claims, including accounting for the impact of corporate actions on emissions, relying on external experts, and addressing conflicts of interest.
According to Gabriela Figueiredo Dias, Chair of Iesba, the information provided to investors and project funders is fundamental to sustainable finance. She emphasized that ethical issues, such as conflicts of interest, rather than technical reporting reasons, lie at the heart of greenwashing and misinformation. Factors such as financial interests, client/company pressures, inducements, and lack of competence can contribute to ethical and independence issues. The International Organization of Securities Commissions (Iosco) has welcomed Iesba’s efforts to update its standards, as mandatory climate-related disclosures are being introduced, making it easier to combat greenwashing through enforcement.
Iesba stated that the proposed new standards could also be adopted by non-accounting firms, including consultants, engineers, and lawyers, who are responsible for over half of sustainability reports. EU regulations permit non-accounting firms to audit sustainability disclosures, albeit to a lower standard than financial statements, in order to introduce competition to the dominant big four auditors: KPMG, EY, Deloitte, and PwC.
The proposed ethics code, combined with the mandatory disclosures and external verification, aims to enhance trust in companies’ sustainability claims. By adhering to globally accepted ethical behavior and independence standards, the proposed framework seeks to ensure transparency and reliability in sustainability reporting and prevent misleading practices like greenwashing.
In conclusion, the International Ethics Standards Board for Accountants (Iesba) is taking steps to introduce a new ethics code aimed at countering greenwashing. This code will require firms assessing companies’ ESG claims to adhere to specific standards, providing guidance on practices such as accounting for emissions impact and handling conflicts of interest. These efforts come alongside the introduction of mandatory disclosures and external verification to combat greenwashing and ensure transparency in sustainability reporting.
