%20(3).png)
In recent years, amidst the rising tide of sustainability investment and sustainability product marketing, a disturbing trend has emerged, known as greenwashing. This article will delve into the concept of greenwashing, explore its implications, and highlight global examples to shed light on Singapore's ongoing battle against this deceptive phenomenon.
Green Finance Market
With the growing awareness and concern about environmental issues and climate change have grown around the world, investor preferences have also changed. Many individuals and institutional investors are now actively seeking investment opportunities that align with their values and support corporations that demonstrate a commitment to environmental stewardship. Demand for sustainability-related funds has experienced rapid growth. A quick glance at the statistics reveals the magnitude of this phenomenon.
Global Sustainable AUM
Source: Morgan Stanley (Institute for Sustainable Investing)
According to Morgan Stanley, the assets under management (AUM) of sustainable funds experienced a decline year-over-year in 2022. However, they continued to grow as a proportion of total AUM throughout the year, reaching record levels of approximately 7%. Moreover, despite the market conditions marked by volatility, inflation, rising interest rates, and geopolitical uncertainties in the past year, the demand for green bonds has remained robust, with Europe taking the lead for green bond issuance. Looking ahead, we expect green bond issuance to rebound in 2023 to recover and potentially exceed 2021 levels, due to the presence of favorable government policies and a more stable interest rate environment.
Regional Breakdown of Green Bond Issuance
Source: Climate Bonds
Lack of Laws and Regulations
However, as the green finance market expands, the risks of greenwashing loom large over corporations, primarily due to the lack of laws and regulations in this field.
On a global scale, the lack of harmonized standards and regulations exacerbates the challenges associated with greenwashing. Different countries and regions have varying degrees of regulatory frameworks and enforcement mechanisms, leading to inconsistencies and potential loopholes that can be exploited by corporations seeking to misrepresent their sustainability efforts. This lack of uniformity makes it difficult for investors and consumers to navigate the global market and identify genuine environmentally responsible investments.
On top of this, ESG disclosures can be both mandatory and voluntary. In the absence of robust regulations, some corporations may exploit the increasing demand for sustainable products and investments by making exaggerated or unsubstantiated claims about their environmental performance. This can involve misleading advertising, selective disclosure of information, or vague and ambiguous terminology that misrepresents their actual environmental impact. Such practices undermine the credibility and trust in the green finance market.
Understanding Greenwashing
According to the Monetary Authority of Singapore (MAS), Greenwashing is the act of making false or misleading claims that products or investments are more environmentally sound, or green than they actually are.
Notable Case Studies on Global Greenwashing Activities
Greenwashing by Financial Institutions
In 2022, the United States Securities and Exchange Commission (SEC), charged Wall Street corporations for misleading investors involving ESG investments.
On 26 August 2022, SEC investigated DWS over accusations of misleading statements about sustainability criteria. They have since modified their ESG criteria, which led to a 75% decrease in reported “ESG assets” compared to claimed “ESG integrated in 2021.
On 26 May 2022, BNY Mellon was charged with a penalty of US$1.5 million for misstatements and omissions concerning ESG in making investment decisions for mutual funds. The company implied that all investments in the funds had undergone an ESG quality review. However, SEC found that numerous investments held by certain funds did not have an ESG quality review score as of the time of investment.
On 22 November 2022, Goldman Sachs Asset Management (GSAM) was charged with a penalty of US$4 million for failing to follow its policies and procedures involving ESG investments. One of their products did not have any written guidelines for ESG research and investigations found employees had utilized prior ESG research to complete ESG questionnaires for corporations included in investment portfolios after securities were selected.
With the rise in ESG funds, SEC is taking significant steps to combat greenwashing. SEC’s charges on BNY Mellon and GSAM signal other Wall Street corporations to be more cautious of their ESG claims and conduct necessary checks to avoid similar repercussions.
Greenwashing Risks Faced by Financial Institutions
Aside from the SEC, EU regulators find growing greenwashing risks for banks, asset managers and pension and insurance providers.
Some examples of these greenwashing risks include:
Banks promoting sustainability initiatives while omitting information about non-sustainable activities
Asset managers making false claims about corporates' sustainability impact and corporate engagements
Pension and insurance providers mislead consumers into purchasing products not originally aligned with their preferences
Greenwashing by Corporations
From a corporate perspective, legal action against French oil and gas giant TotalEnergies (TTE) has been permitted to proceed in Paris judicial court in May 2023. The lawsuit filed by environmental organizations in March 2022, argued that TTE’s plans to address the climate crisis were misleading. TTE aims to reduce Scope 3 emissions from oil production by 2030. However, their overall Scope 3 emissions remained unchanged due to expansions in natural gas production. Contrary to International Energy Agency’s (IEA) recommendations that any new developments in oil and gas fields are “incompatible” with the 1.5°C by 2050 target, TTE’s climate transition plans were falsely portrayed as effective to address the climate crisis.
TTE’s share price declined after news that the court has permitted the lawsuit to proceed. Corporations such as TTE face growing scrutiny as consumers and regulators are increasingly on the lookout for greenwashing, adding litigation risks to corporations’ business and financial risks.
Consumer Backlash from Greenwashing
In 2021, Nestlé Philippines made a commitment to achieve “plastic neutrality” by 2025 by ensuring that 100% of their packaging would be reusable or recyclable. Plastic neutrality is achieved when corporations' plastic production is off-set by removal or reduction of plastic waste from the environment. Instead of reducing plastic production, it was discovered that Nestlé had sent their plastic waste for incineration, posing health threats to the local communities, wildlife and the environment. This led to widespread social media campaigns and protests in front of Nestlé Philippines’ headquarters and consumers boycotting Nestlé’s products.
As consumers are increasingly aware of the climate impact of their purchases, they may withdraw support and engage in “cancel culture” once they realize a brand’s sustainability claims are false or misleading. This affects not only the reputation of the company but erodes consumers’ and investors’ trust, ultimately affecting corporates’ top and bottom line.
Impacts of Greenwashing on Singapore’s Corporations & Financial System
Through global case studies, we can determine that greenwashing risks on financial institutions have severe consequences on the sustainable finance market. Once greenwashing activities are exposed, consumers' and investors’ trust in sustainable financial products will be undermined. Financial institutions face reputational and litigation risks and capital to genuinely sustainable investments will be affected.
Greenwashing can happen in the local context and Singapore is not shielded against such risks. With the rise of ESG investments and funds, greenwashing risks are as likely to increase as regulations in place to mitigate greenwashing have not yet been fully developed. Despite this, corporations should not disregard reporting frameworks and the pressures that investors and consumers place on them.
The crackdown of SEC and EU regulators on corporations’ greenwashing activities highlights the need for more regulations to hold financial institutions and corporations accountable as only a handful of corporate greenwashing activities are uncovered.
Combating Greenwashing: The Way Forward
MAS’ Actions To Tackle Greenwashing
As Singapore's central bank and integrated financial regulator, MAS establishes rules and guidelines to encourage best practices among Singapore’s financial institutions.
From 1 January 2023, retail ESG funds are required to provide clear disclosures on their investment objective and approach, relevant ESG criteria and metrics, as well as regular updates on how their ESG objective has been met. Funds must also allocate at least two‑thirds of net assets for sustainability investments as per their stated strategies.
These new guidelines aim to help reduce greenwashing risks and enable retail investors to make more informed investment decisions.
Data Analysis to Verification of Sustainability
REANGLE envisions that more regulations and guidelines are coming due to growing investors’ demand for ESG and sustainability-related funds.
Corporations can anticipate these changes by providing comprehensive and accurate information about their sustainability practices, backed by reliable data. This transparency enables consumers and investors to scrutinize and verify sustainability claims effectively. Corporations can foster accountability by engaging stakeholders in sustainability decision-making. With open dialogue and feedback, corporations can align their practices with stakeholders’ expectations.
REANGLE’s Green Finance Consulting
REANGLE provides comprehensive Green Finance consulting services for corporations seeking finance for their sustainability business and remodeling their business towards sustainability by analyzing sustainable-related financial data and complying with green regulations.
Commenti