Kazakhstan: ESG reporting and Greenwashing

published on 11 October 2024 | reading time approx. 3 minutes

ESG reporting, which stands for Environmental, Social, and Governance reporting, involves the disclosure of a company's environmental, social, and corporate governance data. The primary purpose of ESG reporting is to illuminate a company's ESG activities, thereby enhancing investor transparency and inspiring other organizations to adopt similar practices. Often, companies incorporate ESG reporting into their annual reports to demonstrate their commitment to sustainability.

While financial reporting is a well-established practice in most countries, non-financial reporting has been significantly influenced by the European Union. The introduction of the Non-Financial Reporting Directive (NFRD) by the EU led to its adoption into national laws across member states. This directive laid the groundwork for non-financial disclosures. The Corporate Sustainability Reporting Directive (CSRD) aims to make these requirements even more stringent.

ESG reporting in Kazakhstan

Kazakhstan does not yet mandate ESG reporting. However, the country has made strides in environmental and social governance. In 2007, Kazakhstan established its Ecological Code, and in 2015, it accepted the United Nations Sustainable Development Goals (SDGs). The ratification of the Paris Agreement on climate change in 2016 further emphasized Kazakhstan's commitment to environmental sustainability. More recently, the focus has expanded to include social and governance aspects, with the establishment of a Corporate Governance Code in 2021 and a Social Code in 2023.

Far from being a regulatory burden, ESG reporting serves as a powerful tool for attracting investors and securing financing. Companies that report on their ESG performance can at least enhance their public image, stand out from competitors, and attract investments. Industries worldwide recognize the immense value of integrating ESG principles into their core operations.

From an investor's perspective, ESG reports offer both qualitative and quantitative insights into a company’s ESG activities. This transparency enables investors to screen investments according to their values and avoid companies with potential risks related to environmental damage, social missteps, or corruption.

Despite the absence of a legal mandate for ESG reporting in Kazakhstan, many companies voluntarily publish their reports. This trend is driven by investor demand – 89 percent of investors consider ESG factors when making investment decisions, according to Bankrate's 2023 investing statistics. Moreover, a PWC report revealed that 76 percent of consumers would stop buying from firms that neglect environmental, employee, or community well-being. These statistics underscore the direct impact of ESG practices on consumer behavior.

The Challenge of Greenwashing

Greenwashing has been defined by the European Securities and Markets Authority as a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants

In the context of ESG funds, greenwashing occurs when funds marketed as adhering to strict ESG criteria fall short in their actual investment choices. Companies may disclose extensive ESG data while performing poorly on actual ESG metrics – a strategy that obscures inadequate performance by overwhelming stakeholders with information. Greenwashing erodes trust of investors into the ESG reporting and ranking.

A 2021 study by InfluenceMap found that 71 percent of 593 ESG funds failed to align with the Paris Agreement targets. Even among climate-themed funds, 55 percent received negative Paris Alignment scores. These findings highlight inconsistencies and lack of transparency in many ESG and climate-themed funds.

There have been cases of Companies being fined millions of dollars for greenwashing, underscoring the real and consequential risks of misleading sustainability claims.

This evolution in accountability comes at a time when environmental, social, and governance (ESG) issues, particularly climate action and carbon emissions, are under an intense microscope. ESG-labeled products, which have soared in popularity for their promise of a green portfolio, now face the rigorous scrutiny of a broader stakeholder base, including regulators who are no longer content with surface-level assertions.

Conclusion

As we navigate the evolving landscape of ESG reporting, it's clear that transparency and accountability are paramount. The increasing scrutiny from regulators and stakeholders worldwide underscores the importance of authentic and comprehensive ESG practices.

As speculation grows about the potential for mandatory non-financial reporting in Kazakhstan, companies must prepare to meet higher standards of transparency and accountability.

In this dynamic environment, understanding the nuances of ESG reporting – from avoiding greenwashing and greenhushing to leveraging it as a tool for investor engagement – is crucial. Companies that navigate these complexities successfully will not only enhance their reputations but also contribute meaningfully to sustainable development.

The escalating prominence of green financing and ESG reporting is a significant trend that businesses cannot afford to ignore. Staying informed about these developments will provide companies with a competitive advantage by allowing them to anticipate regulatory changes and integrate ESG principles into their operations proactively, before it becomes compulsory.

For a comprehensive understanding of ESG reporting and guidance on mitigating risks like greenwashing and green hushing, we invite you to schedule a consultation with our team. Together, we can move towards a future where sustainability and profitability go hand in hand, fostering trust and long-term success.