AIGCC Report on Greenwashing
The Asia Investor Group on Climate Change (AIGCC) and Client Earth jointly released a report to help financial market participants understand what is greenwashing and avoid it.
AIGCC believes that the impact of climate change is more severe in the Asian region, and investors’ awareness of climate risks has made sustainable finance a focus of attention. However, in the absence of global consistency, the issue of greenness in financial markets may have a negative impact on climate financing and ESG development and hinder the effective allocation of resources.
What is Greenwashing?
From the perspective of the financial industry, greenwashing refers to false, deceptive, or misleading statements about financial products, investment strategies on the impact of environment and other aspects. These statements often exhibit a positive impact, but their actual impact does not reach the level described and may even lead to harmful situations.
At present, it is widely believed that greenwashing does not require subjective intention, that is, regardless of whether the subject involved in floating green intentionally misleads or not, if there is a fact of floating green, it can be considered to exist. In the current critical stage of addressing climate change and net zero transformation, the impact of the greenness problem in financial markets is more evident, such as:
- The decrease in capital allocation efficiency has brought difficulties to the commitment to green economy transformation and the Paris Agreement temperature target.
- Investors find it difficult to accurately track the company’s net zero progress and make fair and accurate comparisons.
- Changes in the competitive costs between companies that float green and other companies.
- Confidence in green finance products was affected.
Regulatory Development of Greenwashing
Regulatory agencies around the world have noticed the existence of greenwashing issues and are developing relevant policies. The Financial Conduct Authority (FCA) stated in its strategic plan that it will determine which practices do not meet expectations (such as greenwashing) and protect consumers. The Hong Kong Monetary Authority (HKMA) stated that about one-third of green bond issuers have greenwashing issues.
In addition to regulatory agencies, some financial organizations are also developing relevant standards. The International Organization of Securities Commissions (IOSCO) believes that greenwashing seriously weakens investors’ confidence in sustainable finance and threatens efforts to address climate change and requires members to comply with sustainable financial practices. The International Sustainability Standards Board (ISSB) has also stated that it will create new standards for sustainable development and climate disclosure for global capital markets, to address the issue of greenness from a disclosure perspective.
The Financial Industry and Greenwashing
After recognizing the negative impact of greenwashing, the financial industry has also taken measures from several perspectives:
- Climate disclosure standards: regulatory agencies are transitioning voluntary disclosure to mandatory disclosure. The European Union has issued the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD), providing disclosure standards for the financial and other industries.
- Green labeling standard: the green label of financial products is an important source of exposure for investors to greenwashing. The European Securities and Markets Authority (ESMA) has established labeling rules for ESG funds, while the Financial Conduct Authority (FCA) has imposed restrictions on green, ESG, and sustainable usage.
- Green taxonomy: green taxonomy can determine whether specific actions meet the definition of sustainability through the classification system of economic activities. China and the European Union are developing a Common Group Taxonomy on Climate Change Mitigation, and the Climate Bond Initiative (CBI) has developed the Climate Bonds Taxonomy.
How to Avoid Greenwashing?
To avoid greenwashing, financial market participants can take measures such as:
- Review green statements: Review the accuracy and credibility of green statements. Green statements should be objective, accurate, and not applicable to vague terminology. If ESG impacts are mentioned in the statement, they should be explained specifically. The people should regularly check whether past green statements need to be updated and have a reasonable basis when making future statements.
- Incorporating green statements into decisions: Incorporate green principles into investment strategies in green funds, conduct due diligence on investment targets, such as environmental events, emission reduction targets, net zero paths, etc., and make judgments on the green transition based on survey data. In green financing, ensure that the green concept meets international standards and choose third-party rating agencies to provide reports.
- Implement green policies internally: Ensure consistency between green statements and internal behaviors. From the board of directors, management to business departments, all should adhere to green statements and provide green training for personnel.
- Observe changes in regulatory regulations: Understand the disclosure obligations of the region and provide necessary explanations, such as proof information related to green bonds and transitional finance. Respond to the green expectations of stakeholders (customers, investors, etc.) in the absence of mandatory disclosure.
- Fulfill green responsibilities: The company needs to comply with commitments related to green investment, financing, etc., and be guided by the board of directors and management. Incentive measures can be linked to green goals to measure the progress in green responsibility.