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In the words of Chad Burlingame, Director of Impact Investing at U.S. Bank, Greenwashing can be characterised as a “marketing hype that applies to companies overstating their Environmental, Social, and Governance (ESG) efforts. It also shows up in the investment industry when a fund gets re-labelled as impact or when an Investment Manager repurposes it as impact.”
This appears to be a trap that institutions have fallen into, time and time again. In April, the Frankfurt Public Prosecutor’s office fined DWS, a majority Deutsche Bank-owned Asset Management company, following an investigation that found the firm’s claims that it was a “leader” in ESG investing failed to correspond to reality. And the company’s public response to the €25 million penalty? “We have already acknowledged that in the past our marketing was sometimes exuberant. We have already improved our internal documentation and control processes, and we continue to do so.
Yet, DWS is not the first, nor will it be the last, to succumb to this ‘marketing exuberance’. Goldman Sachs and BNY have also been subject to penalties resulting from misleading investors over ESG policies, suggesting the question might really be, what has led companies to greenwash in the first place?
Creative interpretations.
One reason behind what can be considered Greenwashing, remains confusion. The EU in particular has been prolific in its implementation of climate initiatives, creating over four key legislations in the past five years, including the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD). Yet, some argue this is the very thing that has led to the rise in Greenwashing, where numerous broad regulations have led to differing interpretations of Sustainability and variations on what could be considered ‘green’ policies. So is the solution to Greenwashing found in bringing greater clarity to climate disclosure regulations? And can all acts of Greenwashing be considered intentional, or simply a mistake?
Christian Echavarria, Global Head of Regulatory Services at Apex Group, believes the answer may not be as straightforward as it seems. Although for him, “enhanced clarity in EU regulation and disclosure frameworks has the potential to significantly mitigate future Greenwashing claims,” he believes this use of clarity needs to directly translate into the creation of a standardised criteria for defining Sustainability. In other words, Echavarria remains wary of the potential negatives that the misinterpretation of clarity could bring, namely oversimplification. Generic rules, open-ended disclosures, and limited guidance, he says, may encourage an
environment of “creative interpretations” in Financial Sustainability Reporting, something he believes is unacceptable.
Yann Bloch, Product Manager, NeoXam Americas, agrees that enhanced clarity is needed, but remains more accepting that Greenwashing, at times, may be unintentional. Although he says that greater regulatory clarity may act as a crucial step towards reducing greenwashing risks, “regulations like SFDR are only as effective as the Data behind them. Without reliable, transparent, and consistently interpreted ESG Data, even well-intentioned disclosures can mislead.” In an attempt to remedy the perhaps overabundance of current regulations, the European Commission filed an Omnibus proposal in February, which suggested the scaling back of requirements set out in the CSRD and Corporate Sustainability Due Diligence Directive (CSDDD).
But as Marcos Taboada, Corporate Advisory Lead at Apex Group, points out, one size does not fit all when it comes to legislation. And although the European Commission hopes that the amendments will solve the problem of potential Greenwashing and confusion in corporate climate disclosure, the opposite may be true. “It would be imprudent to assume that scaling back Reporting requirements will not carry the inherent risk of increased Greenwashing,” Taboada argues, where diminished transparency would not only reduce the quantity but also the quality of information available to investors. “These directives were specifically designed to address precisely those issues.” He acknowledges that the original CSRD and CSDDD proposals were highly ambitious, suggesting that some degree of balance in the level of detail required may be welcomed. However, ultimately he says, “Any substantive weakening of provisions could undeniably undermine the significant progress being made in the broader field of Sustainable Finance.”
Yet, how can firms ensure that their Sustainability statements remain accurate and transparent in the face of these everchanging regulations? Echavarria proposes three ways institutions can remain credible in their Sustainability claims. If firms do their part in monitoring the legislative environment, align themselves with recognised Reporting Standards, and offer disclosures that are precise and context-rich, then Echavarria believes they will be more than able to avoid Greenwashing accusations. After all, he says, “Given the rapid evolution of Sustainability Regulations, particularly within the European Union, adaptability is paramount.”
“Clarity and plain language are essential,” adds Carwyn Evans, Managing Director at Waystone. By avoiding unsubstantiated claims and ensuring that statements are backed by credible evidence, she is confident that firms will be able to provide
necessary data to justify their climate declarations.
Going green, growing silent.
All this points to the fact that Greenwashing still remains a prominent issue, with the absence of fully harmonised standards meaning that corporations run the risk of misleading, whether intentional or not, investors and the public. Yet, perhaps the nature of Greenwashing has evolved into a new entity entirely, one where, rather than exaggerating or misrepresenting Sustainability claims, firms are instead keeping quiet. Characterising this as an emerging trend among Financial Institutions, ‘greenhushing’, Echavarria says, is a “phenomenon that occurs when organisations either understate or entirely refrain from communicating their genuine Sustainability achievements.”
There are a number of reasons why firms may resort to these measures. Whether out of a heightened fear of Greenwashing accusations or a sign that rising standards are pushing corporations to drop overambitious claims, going silent is on the rise.
And the facts speak for themselves. Citing Urgewald’s recent ESMA study, Yann Bloch points out that “over 670 European Funds have dropped ESG terms from their names after ESMA’s new guidelines.” This is in addition to South Pole’s Net Zero report, where one in four financial institutions do not intend to publicise
their net zero targets.
So does greenhushing signal a new era for Financial Institutions, where firms are attempting to take a more cautious approach to their environmental strategies, or has it hidden a more problematic truth, where sustainability as a whole has been
dropped from corporate strategies.
One thing is for certain: either through fines or confusion, Financial Institutions can no longer afford to exaggerate their climate objectives.
