From responding to the energy price crisis and the rising cost of living, to the need to address both the nature and the climate crises, to Russia’s war on Ukraine, the last 12 months have delivered profound shifts across the entirety of the sustainability spectrum. In 2022, we also saw regulators in the United Kingdom, United States, Mainland China and Singapore implementing or drafting, new regulations to combat “greenwashing.” My prediction is that this year, there will be more regulations in that area, especially if “greenhushing” – which refers to downplaying and underreporting, or even keeping silent about sustainable practices to avoid scrutiny – is to become the new greenwashing.
As the Convenor of the Greenwash Prevention Working Group (GPWG) of the Institute’s Sustainability Committee, I had the pleasure to host and moderate a panel discussion for a webinar titled “Greenwash Prevention – why it matters and how to address it” on 7 November 2022.
In addition to inviting Gabriel Wilson-Otto, Head of Sustainable Investing Strategy at Fidelity International, to speak from the viewpoint of an asset manager, I invited Dr. Kim Schumacher, Associate Professor in Sustainable Finance and ESG at Kyushu University in Japan, to share his views from both an academic and a scientist’s perspective. The webinar focused on greenwashing behaviour by corporates and providers of sustainability-related financial products and services.
Both speakers agreed that the incredible growth in sustainable investments over the last decade, with sustainable assets under management having reached a volume of more than US$3 trillion in 2021, created an incentive to get on the environmental, social and governance (ESG)-labelled bandwagon and label a fund as “sustainable” without any proper assessments, thereby running the potential risk of greenwashing. In the world of sustainable finance, greenwashing can be defined as “the practice of marketing financial products as ʻgreenʼ or ʻsustainable,ʼ when in fact they do not meet basic environmental standards.”
Dr. Schumacher highlighted that sustainable funds are supposed to reduce sustainability-related risks or generate a positive sustainability impact. However, a lot of these funds made claims that cannot be substantiated with evidence. Another example of greenwashing would be when corporations announce a net zero pledge by 2050 without providing any plans on how they intend to go about achieving that.
Wilson-Otto explained how greenwashing concerns can arise from a lack of standards and different expectations depending on the investment strategy employed by the asset manager (e.g. “thematic focus”; “ESG integration”; “corporate stewardship,” etc.). In addition, greenwashing allegations can have different sources: by design (e.g. intentional misrepresentation of green credentials) or accident (e.g. lack of internal controls to substantiate a product’s environmental claim); absolute differences (e.g. different definitions of “green” in different markets); or differences of degree in implementation (e.g. many investors have cited the need to phase out thermal coal but to date, oil and gas do not have the same explicit exclusion).
Dr. Schumacher discussed the crucial role of ESG data and ESG ratings. One of his key takeaways is that pervasive greenwashing can happen given that ESG data is mostly self-assessed and self-reported by corporates. In terms of ESG ratings, he said that the same company can have a very different score across different ESG rating providers.
Given the continuous momentum in sustainable investing, the regulatory landscape is also evolving rapidly. Instances of regulators either investigating greenwashing risks or prosecuting financial institutions for their ESG-related misstatements have become more common. Dr. Schumacher went through some recent examples of greenwashing by corporates, asset managers and financial institutions. Wilson- Otto then gave an overview of the regulatory and industry response globally, including the need for common standards, product labelling, data quality and availability, and transparency.
The speakers also addressed several questions from the participants including “materiality” and whether there was an effective way to identify if information is a greenwash. The archived webinar is now available for enrolment.
Grace Hui, Convenor of the Greenwash Prevention Working Group of the Institute’s Sustainability Committee, has more than 20 years of international and domestic banking and finance industry experience. She is an Adjunct Professor in the Division of Environment and Sustainability of The Hong Kong University of Science and Technology. She is also an honorary advisor to the Accounting and Financial Reporting Council (AFRC), a member of both the AFRC’s Inspection Committee, and Sustainability and Climate Action Task Force
