The global level of greenwashing incidents by companies has surged by approximately 70% in the past year, according to a data report by RepRisk. The majority of these instances have been taking place in financial institutions with the number of incidents increasing from 86 to 148 between September 2022 and 2023. Although there is no set definition of greenwashing, it refers to when a company misrepresents its sustainability efforts to improve its reputation among consumers and investors.
Consumers and investors have recently increased their demand for eco-friendly practices by firms to incentivise them to value sustainability and achieve higher sustainable investments. However, this has resulted in many companies practising greenwashing to falsely depict alignment with environmental, social, and governance (ESG) goals. The EU mentioned that multiple financial institutions deliberately made “misleading claims” about their sustainability credentials to investors to improve their performance and profits.
This included abstract terms such as “environmentally sustainable” to describe their projects. RepRisk stated that “Over 50% of these climate-specific greenwashing risk incidents either mentioned fossil fuels or linked a financial institution to an oil and gas company”. It is clear that banks have not been transparent to investors and have used the funds they received to finance environmentally harmful energy practices.
The European Banking Federation (EBF) retaliated stating that these results stem from increased scrutiny of the banks’ sustainability commitments instead of deliberate exaggeration of environmental efforts. Furthermore, the EBF argues that banks engage in transition finance, assisting businesses in switching to sustainable production methods. However, the definition of transition finance is still ambiguous and a spokesperson mentioned that “this lack of clarity can lead to unsubstantiated greenwashing accusations”.
Still going strong, RepRisk shed light on the widespread growth of a similar situation termed “social washing” in companies and described it as “obscuring an underlying social issue”, involving the concealment of negative impacts on certain communities, corporate complicity and even human rights violations to avoid controversy and protect their reputation. These reports suggest that the Corporate Social Responsibility (CSR) principles and actions of many financial institutions are severely misaligned.
These practices are undoubtedly undesirable for the environment and society. Primarily, they hinder progress toward global sustainable development goals through resource misallocation. The financial resources intended to support sustainable development are redirected towards funding harmful environmental practices to perpetuate a cycle of environmental degradation. Secondly, the absence of transparency among consumers and investors erodes trust in financial institutions, undermining their role in driving positive change towards environmental and social sustainability. Sustainable investments are usually long-term. Hence, if investors are sceptical of institutional integrity, they will grow risk-averse and be reluctant to commit to such investments. On a large scale, this situation will significantly impede advancement towards global sustainability goals.
Currently, there are no clear measures to mitigate the issue of greenwashing. Nevertheless, institutions, consumers and investors can work towards reducing its severity. Consumers and investors need to put more effort into gaining awareness of the practices of firms instead of taking their claims at face value. They should keep abreast of regulations regarding green claims and deepen their understanding of legal definitions of terms related to sustainability requirements. It is crucial to demand accountability from financial institutions and scrutinise their claims through thorough research to ensure their values and actions are aligned before making decisions.
It is essential for financial institutions to construct a cohesive structure for transition finance to responsibly use funds to their intended purpose and build trust among investors. Alongside this, companies can engage in an audit mechanism where external, independent organisations can provide a comprehensive assessment and evaluation of their environmental claims and practices to increase transparency. In the long run, transparency is fundamental for financial institutions to sustain themselves and improve their performance.
But there is hope. Efforts can be made to rebuild a trustworthy environment to fuel progress towards global sustainable development.