Written by Melissa Weinstein
While the practice of greenwashing has been around in the finance industry for over two decades, many individuals still do not know the meaning of the principle and why it affects all investors. Greenwashing refers to the deceptive practice of portraying a company, product, or service as environmentally conscious and friendly when they are the opposite. The practice of greenwashing is often implemented as a marketing tactic to appeal to consumers. Recently, there has been growth in consumer demand for eco-friendly banks with environmentally conscious services and investing practices. Today, many banks claim to practice environmentally conscious standards to attract clients, however they are using this tactic of greenwashing to mislead consumers. In reality, the majority of financial institutions break the environmental standards set by governing bodies. Starting back in the early 2000s, sustainable investing gained momentum. However, critics highlighted instances where these claims lacked substance, pointing out discrepancies between advertised environmental objectives and actual practices within these financial products. According to research published earlier in 2023, by the World Business Council for Sustainable Development, the number of lawsuits involving ESG-related issues has grown by 25% in the past 30 years (Cook, 2023). This article will take a deeper look into some of these lawsuits and the regulations that have developed in banking to curb greenwashing and eliminate its harmful predatory practices.
An important aspect to greenwashing is understanding ESG Finance, an investment approach that considers Environmental, Social, and Governance factors. ESG takes these factors alongside typical financial metrics to evaluate the sustainability and societal impact of a company. The fundamental goal of ESG Finance is to align financially beneficial investments with ethical, sustainable, and socially responsible principles. As there has been increasing consumer demand for ethical and sustainable investments, there has also been an increasing need for ESG standards and regulations to eliminate practices such as greenwashing. The SEC’s ESG Disclosures for Investment Advisers and Investment Companies has requirements that funds (which consider ESG factors in investment processes) disclose additional information regarding their strategy, information about the impacts they seek to achieve, and key metrics to assess their progress (SEC, 2022). Additionally, the FDIC (Federal Deposit Insurance Corporation) issued the Principles for Climate-Related Financial Risk Management for Large Financial Institutions, n.d.) which is intended to promote consistent understanding of the effective management of climate–related financial risks. The clause does this by requiring institutions to report all details on governance, risk management, strategy, scenario analysis, and metrics. With these guidelines in place, one would think that greenwashing is hard to accomplish, yet that is far from the case.
There have been a plethora of “big banks” accused of greenwashing; many have had to settle lawsuits for millions of dollars when proven guilty. To name a few, Lloyds and Barclays are both institutions which have come under fire for greenwashing. In 2021 and 2022, Lloyds of London was accused of greenwashing as a result of their two ESG yearly reports. Not only did the London institution provide close to zero information on concrete climate action, but the second report says nothing about the outcomes of the climate commitments it made in its first ESG report released at the end of 2020. Lloyds had stated it was asking managing agents to not provide any new cover for fossil fuel based industries and assets (coal-fired plants, coal mines, oil sands, etc) starting on January 1st 2022; yet, the follow-up fails to mention whether or not its members are fulfilling this commitment. In fact, members of the Lloyds market team did not stop providing new insurance cover for new coal projects. It is clear and definitive greenwash when Lloyds says that it is committed to net-zero carbon emissions by 2050, but does not give detailed targets, enforce the targets, or express a climate science aligned policy (Future, 2022).
Secondly, Barclays loan to Shell in 2023 furthered greenwash backlash on the bank. It was reported in the summer of 2023 that Barclays bank made a $10bn revolving credit facility available for oil giant Shell and categorized it as “social and environmental” financing. By doing this, Barclays counted this loan to Shell under its target (stated in their ESG report) to deliver $150 billion in social and environmental financing. While Shell argues that it practices sustainability through the company’s goal to reduce the carbon intensity of the energy products it sells to 9-13% by 2025, it is hard to believe and understand that this big oil and gas company is sustainable and climate/environment friendly. Shell itself has been accused of greenwashing when they “watered down” earlier commitments to start phasing out oil and gas production and put more investments and money into renewables. (Sustainable? | Barclays Loan to Shell Comes Under Scrutiny as Greenwashing Backlash Continues, 2023)
As a result of the multitude of cases of greenwashing, the US SEC along with EU institutions have “cracked down” on greenwashing funds with new investment requirements. The change was made to the SEC’s “Name Rule” and now requires that 80% of a fund’s portfolio matches the asset advertised by its name. According to SEC chair Gary Gensler, “A fund’s investment portfolio should match a fund’s advertised investment focus…such truth in advertising promotes fund integrity on behalf of fund investors.” (Gillison & Price, 2023) With this rule, funds that were named with greenwashing terms such as “growth” and “value” are placed under fire. These words can no longer hide funds that support fossil fuels production and do not meet ESG guidelines.
With greenwashing significantly impacting everyday citizens and consumers in several ways, all these policies and case studies are greatly applicable. Greenwashing erases consumer trust by misleading individuals into believing they are supporting environmentally friendly products or companies when they truly are not. This deceit can lead to skepticism, making it nearly impossible for consumers to make informed decisions and choices about true sustainable products and services. Furthermore, the financial implications for investors is large as consumers can be allocating their money and funds on false premises. This can lead to financial losses when investments are made in entities and stocks that do not genuinely align with the ethical or sustainable principles that were promised. The more that greenwashing cases and the regulations in place to prevent it are understood, the more informed all citizens can be regarding their investment decisions and the institutions and companies they choose to trust.
References
Cook, C. (2023, August 16). Greenwashing in finance: a closer look. Risk Business. https://riskbusiness.com/blog/greenwashing-in-finance-a-closer-look/
Future, I. O. (2022, May 19). Lloyd’s new ESG report: greenwashing, not climate action – Insure Our Future Global. Insure Our Future Global. https://global.insure-our-future.com/lloyds-new-esg-report-greenwashing-not-climate-action/
Gillison, D., & Price, M. (2023, September 20). US SEC cracks down on funds “greenwashing” with new investment requirement. Reuters. https://www.reuters.com/sustainability/us-sec-poised-ban-deceptive-esg-growth-fund-labels-2023-09-20/
Principles for Climate-Related Financial Risk Management for Large Financial Institutions (n.d.). https://www.fdic.gov/news/financial-institution-letters/2023/fil23056.html
SEC. (2022). ESG Disclosures for Investment Advisers and Investment Companies. United States Securities and Exchange Commission. https://www.sec.gov/files/ia-6034-fact-sheet.pdf
Sustainable? | Barclays loan to Shell comes under scrutiny as greenwashing backlash continues. (2023, August 8). Recharge | Latest Renewable Energy News. https://www.rechargenews.com/energy-transition/sustainable-barclays-loan-to-shell-comes-under-scrutiny-as-greenwashing-backlash-continues/2-1-1497905