Source: Asia Development Bank
Environmental, Social, and Governance information—non-financial corporate data—has become increasingly important in today’s market. According to Bloomberg earlier this year, global ESG investments amounted to USD 30 trillion in 2022 and are expected to surpass USD 40 trillion by 2030. As studies continue to show that ESG performance influences corporate value, financial outcomes, and borrowing costs, ESG disclosure is now taken more seriously than ever.
However, the legal framework for ESG disclosure remains incomplete, leaving consumers and investors vulnerable to misleading practices such as ESG washing. ESG investments are rapidly growing and influencing business activities, yet concerns[1] persist over greenwashing—where companies falsely promote or exaggerate the environmentally friendly attributes of their actions or products. International organizations and regulatory authorities across various countries are working to establish and strengthen non-financial disclosure requirements, but a universal regulatory framework is unlikely to emerge quickly due to the complexity and diversity of ESG information.[2]
Despite these challenges, such a regulatory framework is essential, as greenwashing fosters false perceptions among consumers and investors, leading to misunderstanding and potential harm. A notable example is the 2015 Volkswagen emissions scandal, in which the company deliberately manipulated diesel engine performance during emissions tests, misleading regulators and consumers alike.[3] More recently, concerns have been raised that banks with weak ESG evaluations have greenwashed their performance by increasing lending to companies with stronger ESG ratings.
While establishing a legal framework to impose sanctions for misleading ESG disclosures would help mitigate greenwashing risks, developing such a system is expected to take significant time. Although ESG disclosure obligations are strengthening worldwide, variations in mandatory reporting content and format between countries will likely persist for the foreseeable future. Ensuring consistency, accuracy, and comparability in ESG disclosures remains a complex challenge.[4]
Moreover, non-financial information—such as environmental, governance, and social data—often presents greater information asymmetry between companies and investors than financial metrics. Quantifying and standardizing this information is difficult, as its relevance varies by industry, making it challenging to define uniform disclosure standards. Additionally, some ESG disclosure obligations have not been introduced based on investor materiality but rather due to historical factors, such as responses to industrial accidents, social concerns, environmental damage, or governance failures.[5]
As a result, reporting obligations for many critical ESG indicators that matter to investors remain absent or incomplete. Yet, markets and investors must continue making decisions based on these fragmented disclosures, increasing the risk of confusion and financial loss.