International Capital Market Association’s View on ESG Greenwashing
The International Capital Market Association (ICMA) recently issued a document in response to the solicitation of opinions from European regulators on ESG greenwashing and put forward new views on the definition of greenwashing, the causes of greenwashing and solutions. ICMA said that more than 98% of the sustainable bonds issued globally in 2021 have met the criteria of green, social, sustainable, and sustainable linked bonds.
ICMA Proposed the Clear Definition of Greenwashing
ICMA believes that the European regulatory authorities have described some common bleaching behaviors of issuers and products in the documents for comments but have not given a specific definition for the problem of bleaching. Therefore, the regulatory authority needs to formulate a clear, fair, and operable definition of bleaching. ICMA believes that the financial industry can define greenwashing as:
Greenwashing means that to meet regulatory requirements, the issuers of financial products (such as sustainable bonds or ESG funds), intentionally or unintentionally:
- Make false statements of sustainable characteristics;
- Make improper commitments to sustainable action;
- Make false propaganda of sustainable achievements;
The phenomenon of greenwashing in the current market is more complex and difficult to identify than 36 years ago. Greenwashing can be understood as “declaring green actions to the outside world when do not meet the green standards”, or “exaggerating green actions”.
Deep Dive on ESG Greenwashing, ESG Information Website
The Concerns of Greenwashing by ICMA
ICMA analyzes the problems of current financial products in ESG greenwashing, including sustainable bonds and ESG funds.
For sustainable bonds, ICMA believes that:
- Issuers lacks motivation for the sustainability of bonds: for the purpose of raising bond funds, the issuer may use them for non-sustainable and eye-catching purposes. For sustainable linked bonds, if the sustainable goal is too simple, the issuer will be very easy to complete, and if the sustainable goal is too difficult, the issuer cannot complete it, it can also use it as ordinary bonds;
- Issuers lack management of sustainable risks: many issuers may not be able to effectively identify and manage ESG risks. At the same time, when some sustainable projects conflict with each other, issuers need to make trade-offs;
- Issuers lacks consistency in sustainable actions: the actual actions of the issuer may not be consistent with the green actions publicized by the bond;
- Fraudulent behavior of the issuer: in addition to investing the funds of sustainable bonds into non-sustainable projects, the issuer may create false sustainable KPIs or omit important information in the disclosure;
For ESG funds, ICMA believes that:
- The ESG investment method of the fund is not detailed enough: the investment target of the fund may perform well in one aspect of the ESG, but it does not meet the requirements in another aspect. Different funds have differences in whether to invest in such assets.
- The name of the fund is misleading to some extent: the words “transformation” and “influence” are added to the name of the fund, but the actual investment may be inconsistent with the name, misleading investors;
- Fraudulent behavior of the fund: ignoring the ESG investment method publicized by the fund in actual investment;
ICMA’s suggestions on bleaching
ICMA believes that to reduce the risk of bleaching, regulators can:
- Voluntary adoption of ICMA’s green bond and social bond guidelines, including the core content of the guidelines and some suggestions;
- Use the international green taxonomies method to give a consistent and feasible definition of the green behavior of business activities;
- Voluntary increase of third-party green certification to improve the credibility of green financial products and protect ESG investors;
Reference:
ICMA response to the ESAs’ Call for Evidence on greenwashing » ICMA (icmagroup.org)
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