In February 2023, Global Witness filed a complaint with the US Securities and Exchange Commission against Shell. The issue was not a breach of law, but a gap between Shell’s stated sustainability commitments and its actual investment practices. In its 2021 annual report, Shell indicated that 12 per cent of its capital expenditure was directed toward renewable energy. However, internal data suggested that only around 1.5 per cent was allocated to solar and wind, with the remainder grouped under “transition energy”.
It shows how a disconnect between promise and operational reality can emerge, persist through internal processes, and reach investors without meaningful challenge. In that sense, it reflects a broader structural issue rather than an isolated failure.
For the past three decades, sustainability reporting is operated within a framework. Firms were encouraged to disclose environmental and social information, but the standards were uneven and irregularly enforced. This created an incentive structure: companies making ambitious sustainability claims attracted ESG-oriented capital while facing limited legal risk if not fully substantiated. The result was an expansion of sustainability narratives that were aspirational and only loosely connected to verifiable reality.
Regulatory frameworks nudge sustainability reporting into legal accountability. Claims are no longer assessed on intent or ambition, but on scrutiny. What was once a communications exercise is becoming a compliance obligation.
From guidance to enforcement
Sustainability regulation is understood as a shift from moral persuasion to legal enforcement. Earlier initiatives encouraged transparency but did not impose meaningful verification requirements. Firms that maximized disclosure and claim ambition were often rewarded, regardless of performance.
Empirical research shows that high ESG disclosure is frequently associated with weaker ESG outcomes, reflecting patterns of selective reporting. The regulatory response has been to move toward enforceable standards. The change is not regulatory interest, but the tools available for enforcement.
The new regulatory architecture
The EU’s Corporate Sustainability Reporting Directive (CSRD) is a key example of this shift. It expands reporting requirements and introduces double materiality, requiring firms to assess both how environmental risks affect the company and how the company affects the environment.
This alters the logic of reporting. Claims must be supported by consistent data, aligned across disclosures, and increasingly subject to external assurance. Over time, that assurance is expected to approach the level applied in financial reporting. Sustainability disclosures are moving away from narrative statements toward legally accountable outputs.
The EU’s Sustainable Finance Disclosure Regulation (SFDR) highlights another issue, its classification system was interpreted as a signal of sustainability quality. In practice, many financial products were labelled sustainable. This exposed a limitation of disclosure regimes becoming a vehicle for misrepresentation.
In the UK, the Financial Conduct Authority has taken a more direct approach. Its anti-greenwashing rule requires sustainability-related claims to be clear, fair, and not misleading, extending financial promotion standards into ESG communications. What was reputational is now lawful.
Patterns of governance failure
Greenwashing cases reveal a structural pattern. Firms do not necessarily fail because they intend to mislead, but because their governance systems are not designed to test sustainability claims before publication.
Four types of failure recur. Definitional failure occurs where internal classifications distort external understanding. Methodological failure arises when firms rely on favourable measurement approaches without disclosing alternatives. Process failure reflects a gap between claimed ESG integration and actual practice. Forward-looking failure involves commitments without a sufficiently robust evidentiary basis.
These categories overlap but share the absence of mechanisms for verifying claims before disclosure. These gaps translate directly into legal and financial exposure, as scrutiny increases.
Structural origins of the problem
These governance failures are rooted in the development of sustainability reporting. Financial reporting evolved within auditing, verification, and legal accountability. Sustainability reporting developed within a framework oriented toward communication, stakeholder engagement, and reputation management.
This produced aspirational claims and reliance on estimated data. It was not designed to answer a regulatory question: Can this statement be verified?
Four structural weaknesses follow here. Metrics weakness reflects the absence of consistent baselines. Supply chain weakness stems from reliance on estimated Scope 3 emissions. Accountability weakness arises where sustainability reporting lacks financial-level oversight. Verification weakness reflects the absence of internal testing before publication.
Now mandatory assurances disrupt this model. Sustainability disclosures are assessed in terms of consistency, transparency, and evidence. Systems that were designed for narrative coherence are being tested in an environment defined by scrutiny and enforcement.
Toward evidence-based ESG governance
The shift toward evidence-based ESG governance is now structural. The key issue is the viability of substantiation for disclosures. This requires linking claims to underlying data, methodologies, and assumptions. It also requires transparency in methodological choices, especially where alternatives could produce different outcomes. Supply chain verification becomes critical given the scale of value chain impacts. Legal review must assess not only factual accuracy but also the overall impression created.
Together, these elements move sustainability reporting toward verifiable claims. Under emerging frameworks, this is becoming the baseline standard for compliance.
The geopolitical dimension
A limitation of the ESG framework is the weak integration of geopolitical risk. Many transition strategies rely on assumptions about stable access to critical materials, despite concentrated supply chains and increasing export controls.
Recent restrictions on key minerals show how geopolitical developments affect cost and availability. These factors directly shape the feasibility of transition strategies yet are often under-integrated in disclosures.
Under double materiality, this omission becomes harder to justify. Firms are expected to assess external risks that could undermine their strategies. Without geopolitical analysis, transition plans risk being based on assumptions that are neither visible nor defensible.
Conclusion
The shift from voluntary disclosure to legal accountability marks a fundamental transformation in ESG governance. The question is no longer whether companies make sustainability claims, but whether they can withstand scrutiny.
Greenwashing is not intent, but the outcome of governance systems not designed for verification. As regulatory expectations evolve, these systems are increasingly exposed.
Effective ESG governance is defined by evidentiary integrity. Claims must be supported by data, consistent methodology, and viability of verification. The gap between promise and reality is no longer reputational – it is legal.
Firms that bridge this gap will be more credible. Those that cannot, will face increasing regulatory and litigation risk.
