Greenwashing in banking: real concern or overblown issue?

Reputational risks abound for those who drag their feet about sustainability or engage in greenwashing.

How much of the sustainability initiatives reported by banks are true, and how much are conflated? The reality is, it’s hard to measure how prevalent greenwashing has become– or even just the level of how green a bank has become, experts told Hong Kong Business.

“I think it's quite difficult to assess how prevalent greenwashing is. Firstly, I don't think anybody really does a reliable analysis of how prevalent greenwashing is. It’s detected anecdotally by incidents,” Eugene Goyne, EY Asia-Pacific Financial Services Regulatory Lead, told Hong Kong Business in an interview. 

“What I would say is, there's a massive increase in the volume of sustainability disclosures coming from different perspectives,” Goyne said.

With the increasing amount of sustainability-linked financial products and disclosures coming out, it’s expected that there will be a level of mistakenly inaccurate or misleading statements, and even an element of deliberate misrepresentation or fraud. But this isn’t limited to just greenwashing, Goyne said– it’s a common occurrence when disclosures and regulations are involved.

“Sustainable finance is no different in that respect to other forms of financial disclosures or product disclosures,” Goyne noted. “There'll be a level of mistake and there'll be a level of fraud. You see that in listed company disclosures and bank disclosures and asset manager disclosures. But sustainable finance isn’t any more vulnerable to that.”

Goyne recognized, however, that reputational risks abound for those who drag their feet about sustainability or engage in greenwashing practices.

“Trust and disclosures to the financial system are absolutely critical for the system to help society transition to a more sustainable future. And greenwashing will undermine that trust when it occurs, if it's prominent enough, or widespread enough. It's hard to say how much it's affected the trust in a brand, but it will be damaging when it occurs,” Goyne said.

More promises, less action
Where exact data on greenwashing could not be found, companies’ performances can be studied. A research by the Hong Kong Monetary Authority (HKMA) released in 2022, for example, found that about one-third of corporate green bond issuers were found to have poorer environmental performance after their initial green bond issuance. 

Whilst this might not directly reflect the status of greenwashing in 2023, this indicates a level of greenwashing prevalence in the market, especially when there are not yet any fines introduced by the regulators in APAC, says Alan Au, APAC ESG Lead at Capco. 

There is no similar study conducted for banks, but there were studies that bank investments to sustainability have stagnated in one of the major markets of interest when thinking about greenification: energy. A study by Sierra Club, Fair Finance International, BankTrack, and Rainforest Action Network found that just 7% of the total financing value extended by banks to companies for energy projects were funnelled to renewable energy.

“We did see that over the period [2016-2022], there is an increase in the value of financing that's going to renewable energy. But at the same time, there's also an increase in the value of financing that's going to companies engaged in fossil fuels,” Ward Warmerdam, Senior Financial Researcher for Profundo, had earlier noted to ABF.

The lack of structure…
A major challenge to accurately measuring and reporting sustainability efforts of financial institutions (FIs) is the lack of high-quality and reliable ESG data to enable clear net-zero commitments and adequate implementation plans to align with the local decarbonisation aims, Au said.

The lack of regulatory enforcement on established ESG guidelines is another challenge. This is compounded by the fact that there seems to be no consensus amongst regional and global regulators on how sustainability should be reported or measured.

“Let's take the example of the EU regulation, what’s called the SFDR, or the sustainable finance disclosure regulation. It requires fund managers to label funds as to what type of ESG goals they have,” Goyne said. “The labels are regarded by the industry as very confusing, and I’m not sure many consumers would understand.”

Risks of fines or other sanctions imposed by regulators are strong drivers for investors to do more due diligence and to interrogate claims and labels made by institutions, according to Au.

“There is good news, since we are witnessing more climate reporting regimes becoming compulsory and believe that central banks and other authorities will also be expected to pursue enforcement action soon,” Au said.

…Is not an excuse
The absence of this “common” standard or regulation, however, should also not be treated as an excuse as to why banks are failing to become more sustainable, having problems meeting earlier sustainability commitments, or resoring to greenwashing.

“What each financial institution has to do is to look at its profile, the types of claims that they are making, the risks they are facing, and then act appropriately,” Goyne said.

At a product level, banks must have a good product governance structure.

The bank, especially, has to review how it understands the products it’s selling, the customers it is selling said products to, and what their sustainability preferences and investment choices are, according to Goyne.

Line between guidance and control
One big risk that banks face when it comes to possibly greenwashing is the actions of their clients– particularly when it comes to lending.

As an example, Goyne noted that a bank can lend money to a company for a perfectly sustainable activity. However, it becomes an issue when said client suddenly goes off and does something that is not sustainable.

“Say, I’m a bank and I work with my corporate client on a green bond, for example, to build smokestack filters so it doesn't pour as much greenhouse gases into the environment. And then that same company goes and dumps a lot of dangerous chemicals in a river,” Goyne said. In this case, the question becomes: who is at fault– and could the bank be faulted?

Au, meanwhile, outlined three ways that banks and FIs are engaging in greenwashing: empty commitments; exaggerating green or sustainability credentials of their products and services; and underrepresenting exposures to relevant environmental risks.

Both Au and Goyne, however, believe that not all instances of “greenwashing” are intentional.

“It can occur from a lack of ESG or sustainability-related capability in the organisation or reliance on ESG data obtained from third parties that might not provide the most comprehensive and relevant information,” Au said.

Need of education
Furthermore, despite the growing number of banks putting out sustainability products, demand for it from within Asia is slow to pick up.

“There's possibly less social concern about greenwashing here in Asia or public awareness,” Goyne noted. “Demand for ESG products in Asia, particularly at the retail level where there might be concerns about greenwashing, is not significantly high yet.”

The hesitance arises from concerns on returns and the lack of knowledge around sustainability issues.

“Is the history of product performance good enough? Is there enough wide range of products? How do I understand what I might be buying?” Goyne noted, adding that clients are concerned that they may not really understand sustainability.

The future
Au advised institutions to improve their long-term capacity to prevent greenwashing–by developing capability to respond to the fast-changing regulatory landscape and to source and manage high quality data that helps them monitor and disclose their ESG performance and progress.

Experts welcomed the increasing ESG oversight across Asia, noting that greenwashing as it stands today is no longer just a matter or reputation, but also presents risks to the financial system and the economy at large.

“With Asia predicted to account for over two-thirds of the global GDP at risk from climate change by 2050, the region cannot afford to slow its green transition to prevent the most catastrophic consequences. That is why we advise banks and financial institutions to combat greenwashing to not only contribute to governments’ ESG objectives but also enable themselves to effectively transition to the low-carbon economy in the future,” Au concluded.

Goyne, for his part, emphasized the necessity for continually informing and teaching the public on sustainability issues.

“Education is really important here and that's not just education of the industry and people in the industry. It's also education of the public. Because even in the public, sustainability, climate change, they're very complicated topics.

“I'm not sure to what degree sustainability and climate change is really treated as a subject in schools, and how much your average citizen really understands these issues in an actionable sort of way. So if I, as a citizen, see your company making statements, do I understand those statements? Do I understand how serious climate change is and how it works? If I was faced with an investment opportunity that said it's climate positive, would I understand what they're saying? Some basic literacy on those topics would be very useful, not just in financial services, but for society as a whole,” Goyne concluded.