Financial service providers need to step up their internal anti-greenwashing practices, according to an industry discussion paper published on Wednesday.
“Successfully addressing greenwashing is a critical priority for banks, as it affects confidence in ESG practices and the credibility of their sustainability commitments,” the Luxembourg Bankers’ Association (ABBL) and consultancy Deloitte wrote in the paper.
The paper aims to help banks navigate a complex situation, counter mistrust among investors and spark a conversation around finding a harmonised definition of greenwashing, three of the report’s authors told the Luxembourg Times in an interview.
Bettina Werner, partner, finance and sustainability transformation at Deloitte Luxembourg © Photo credit: Deloitte
“‘Greenwashing’ has become a catch-all term to illustrate the regulatory complexity surrounding sustainable finance,” stated Alexandre Dias, financial markets and ESG adviser at the ABBL. But there is no “clear, consistent definition across the regulatory framework.”
Particularly since 2019, an alphabet soup of regulations has been “creating confusion for investors” and for financial firms that need to comply with the rules, Dias said.
The list includes the EU’s Sustainable Finance Disclosure Regulation (SFDR), Corporate Sustainability Reporting Directive (CSRD) and green taxonomy, along with fund naming guidelines issued by the European Securities and Markets Authority (Esma).
Marilyn Rinck, head of banking regulation, financial markets and ESG at the ABBL, called the list “a maze of overlapping rules”. Policymakers are “constantly issuing new regulations”, she said, which means financial firms run the risk of inadvertently breaching the rules because they have not been able to keep pace with evolving requirements.
Alexandre Dias, financial markets and ESG adviser at the Luxembourg Bankers’ Association (ABBL) © Photo credit: ABBL
One main conclusion of the report is that the vast majority of greenwashing is “unintentional greenwashing,” said Bettina Werner, finance and sustainability transformation partner at Deloitte Luxembourg.
Intentional greenwashing is when companies deliberately design products or make claims to appear greener than they are in reality.
On the other hand, financial firms may “have very, very good intentions” but face “new regulations almost on a daily basis,” Werner stated, explaining that they need to constantly ask themselves: “How can I keep track of that? How can I make sure that all my employees and advisors are up to date, and that they’re not saying something which is outdated and that’s why the client may have a different perception?”
How ‘green’ terms influence investors
Differing perceptions create a mismatch between financial companies and clients. Take, for example, investment funds classified as article 8 under the EU’s SFDR. These funds use ESG criteria as part of their investment-making process. That means environmental factors are taken into account, “but you can have a very low percentage of alignment with sustainable objectives,” observed Dias.
“It’s not greenwashing” for the bank that sold the fund because the fund complied with the EU’s technical regulations, explained Dias. “But it could be perceived as greenwashing” by the bank’s clients because the fund is not actively supporting green goals.
Defining ‘green’
Indeed, “when you talk about a green product, your expectations may be different than mine,” Werner said. “So some of these things need to be defined to say, ‘for me, green means the following’.” If banks clearly spell out what they “consider as a green product” then clients “can say, ‘this is lined up with what I believe’ or not,” she said.
The paper aims to “drive a bit of convergence” of what exactly the term greenwashing means across the entire market, said the ABBL’s Rinck.
Marilyn Rinck, head of banking regulation, financial markets and ESG at the Luxembourg Bankers’ Association (ABBL) © Photo credit: ABBL
In the meantime, financial institutions should “define things internally, basically for them to say ‘what I say is what I do’ and ‘this is what I document,” Werner said. Banks should “at least provide some consistency in the way what they promise is actually what they do.”
That starts at the top. “The green appetite of the [board of directors and management committee] needs to be very clear in [defining the bank’s] ambition,” said Rinck.
After all, Werner noted, “you can’t manage what you haven’t defined.”
The paper, “How to introduce best practices to prevent greenwashing”, is available on the ABBL website.
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