Greenwashing, standards and market failures

Chair of the International Accounting Standards Board (IASB) Hans Hoogervorst has warned of exaggerated expectations for sustainability reporting as a catalyst for change in the absence of policy and political intervention.

Delivering a speech at the Climate-Related Financial Reporting Conference in Cambridge, Hoogervorst described the lack of action on climate change as a market failure, citing the aviation as an example of pricing failing to reflect the negative externalities of flying. Coming shortly after Ryanair has entered Europe’s top ten polluters Hoogervorst’s example has resonance, and he noted that taxes would be necessary to adequately price in its negative environmental impact, but in fact aviation is not subject to fuel tax or VAT. He commented: “The economics of the aviation industry is a market failure, compounded by a public policy failure.”

Hoogervorst also neatly dissected corporate sustainability standards initiatives (apparently there are now at least 230 according to the FT) into two basic kinds: promoting behavioural change by requiring companies to demonstrate how they contribute to the public good – viewing society at large as the audience of reporting, and secondly, the impact of sustainability issues on the company itself, and viewing investors as the main audience.

Of course, agreed stands and measurement are essential in all forms of reporting, and indeed in order to expose those areas that are in danger of being market or policy failures. Hoogervorst points out that there are “simply too many standards and initiatives in the space of sustainability reporting” and uses than example: Tesla is ranked highest in terms of the sustainability index of MSCI, while FTSE ranks it as the worst carmaker globally on ESG issues.

However the main issue Hoogervorst highlights is misreporting. “Greenwashing is rampant” he notes, and notes that when “the VW emissions scandal broke, VW was leading the Dow Jones sustainability index's automotive sector, and its Audi subsidiary was running TV commercials featuring Kermit the Frog singing ‘it isn’t easy being green’”.

As an interesting aside, Hoogervorst revealed that he too had been a liberal, free-market oriented politician, and sceptical about climate change, but reviewed his position, staying “I do not just believe in markets, but also in science and I could simply no longer ignore the growing numbers of Nobel prize winners warning against climate change. Moreover, while I still believe that free market policies generally deliver the best results, I also acknowledge that public policy is needed to counteract market failures.”

Full transcript of speech

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