Monday, 27 May 2024

How regulators can combat greenwashing and greenhushing for more honest ESG financing

5 min read

By Kate Berbano

As sustainable finance grows, global governments and stakeholders employ AI and regulations to tackle greenwashing and greenhushing, promoting transparent, authentic ESG investments and underlining the importance of ethical finance, transparency and innovation

Sustainable finance has emerged as a pivotal force in addressing global environmental challenges and promoting ethical economic practices. This trend entails integrating environmental, social, and governance (ESG) criteria into investment decisions to support organisations and projects that benefit the environment and society.

However, with the surge in demand for sustainable investments, the spectre of greenwashing looms large. Greenwashing involves the deceptive portrayal of a company, investment, or financial product as more environmentally friendly or socially responsible than it is. Further, the lack of a legal definition for greenwashing calls into question the authenticity and efficacy of sustainable finance initiatives.

As investors increasingly seek ethical and sustainable alternatives, the banking and financial services industry grapples with the imperative for transparent and standardised frameworks to evaluate and authenticate the sustainability claims of diverse assets. Distinguishing genuine commitments to sustainability from mere marketing tactics is vital for upholding the integrity of sustainable finance and catalysing meaningful impact on environmental and social issues. Regulators play a pivotal role in combating greenwashing to bolster consumer and investor confidence, and encourage greater investment.

Industry titans under scrutiny

In response to mounting criticism and dwindling demand, major US asset managers shuttered over 20 ESG funds in 2023. Industry giants like BlackRock withdrew from ESG funds amid heightened scrutiny from both government and investors. As early as 2020, the world’s largest money manager faced criticism, particularly from former US Vice President Al Gore and hedge fund TCI’s Christopher Hohn, for often working directly with corporations through its internal ‘stewardship’ staff rather than using its voting power. 

BlackRock’s voting record on green measures has been rated poorly. In 2019, Ceres, a sustainability nonprofit group, ranked BlackRock at 43 among 48 asset managers, indicating sub-par support for climate-related proposals in 2018. On the flip side, Republican leaders have criticised BlackRock for prioritising sustainability over investor returns and allegedly boycotting fossil fuel sectors in 2022. Environmental activists have argued that BlackRock remains significantly invested in polluting industries.

Larry Fink, the chair and chief executive of BlackRock, is facing a proxy challenge from UK activist investor Bluebell Capital Partners over his dual role at the company, and its sustainable investing practices. Bluebell, with assets of $120 million, has proposed a binding resolution for BlackRock’s upcoming annual general meeting on 15 May to require an independent board chair. This move highlights concerns over BlackRock’s governance, especially its ESG strategies and its effectiveness in addressing climate change.

Critics have accused BlackRock of not doing enough on climate change, despite its substantial influence and $10 trillion in assets under management. The challenge also comes amidst broader investor pressure on US companies to separate the roles of CEO and board chair to enhance oversight and accountability, particularly in companies under scrutiny for environmental policies.

In 2023, European banks including UBS, HSBC, and Santander were implicated in significant environmental damage. The scrutiny came amid growing concerns over supposedly green investments designed to support eco-friendly activities. Allegations focus on the Brazilian green bond market, where international environmental NGO Greenpeace claims UBS and Santander, along with other non-European banks, acted as intermediaries. According to a report from Greenpeace‘s Unearthed project, these banks facilitated investments that ultimately funded controversial entities, including deforesters, land grabbers, and ranchers accused of employing slave labour in Brazil.

Institutions like Barclay, meanwhile, are restructuring operations to navigate the thin line between business growth and accusations of greenwashing. The UK lender has assembled over 100 bankers to form a specialised transition-finance team tasked with developing its business creatively minus the taint of greenwashing. This new team, headquartered within the bank’s corporate and investment banking segment, is at the forefront of developing financial products and solutions that help clients reduce their carbon footprint. It is one of the first projects within a large bank to provide a clear concept of transition finance.

In September 2023, the Securities and Exchange Commission (SEC) charged DWS Investment Management Americas (DIMA), a Deutsche Bank subsidiary, with two separate enforcement actions. The first action addressed DIMA’s failure to develop a compliant anti-money laundering program for the mutual funds it advised. The second action focused on DIMA making misleading statements about its ESG investment processes. Despite marketing itself as an ESG leader, DIMA did not implement its ESG policies as claimed from August 2018 to late 2021. To resolve these charges, DIMA agreed to pay $25 million in penalties.

BNP Paribas Asset Management (BNPP AM) released its groundbreaking Global Sustainability Strategy (GSS) in January 2024, over a year after NGOs sued it for supporting fossil fuels. With this comprehensive plan, the company’s sustainability efforts have changed significantly. The GSS aims to develop its sustainable and impact-investment portfolio in climate action, nature-based solutions, and economic equality. BNPP AM also plans to educate staff and clients to improve communication in order to minimise greenwashing and adapt to industry changes. These developments are driven by geopolitics, technology, and demographics.

Greenhushing less-desirable practices

With sustainability and environmental concerns gaining traction, a new phenomenon known as greenhushing has surfaced, wherein banks deliberately downplay their sustainable activities to avoid highlighting less desirable practices. 

BlackRock, for example, has removed many references to its goal of reaching net zero emissions by 2050 from its website. However, the CEO reiterated that the company will continue to engage in climate-related discussions with the companies in which it invests.

Similarly, HSBC has been accused of greenhushing in recent months. The asset management firm downgraded numerous Article 9 funds that were solely invested in sustainable assets to the Article 8 category; while the funds in this category emphasise environmental or social considerations, they are not compelled to aim for a sustainable end. HSBC highlighted compliance with higher EU regulatory criteria as the cause for the downgrade, stating that it would not change the funds’ objectives or practices. However, Planet Tracker, a non-profit financial think tank, believes that this step may have been taken to avoid investor scrutiny.

In March 2024, JPMorgan and several other significant financial organisations withdrew from Climate Action 100+ (CA100+), which was previously touted as the world’s largest investor group focused on climate change mitigation. Initially, these large financial firms had joined the organisation with commitments to reduce their environmental impact, but some of the biggest have left, including Vanguard and State Street, as CA100+ ramped up its activities, described by one consultant as “vocal and aggressive”. 

While Bloomberg reported that JPMorgan did not blame its exit on a shift in priorities, the bank then announced the launch of an independent strategy for environmental protection. Some of the other organisations that left CA100+ have followed a similar route, in what could be interpreted as greenhushing to avoid scrutiny while also virtue-signalling as ESG warriors.

Global regulatory initiatives

Across the globe, regulatory bodies are stepping up efforts to combat greenwashing and promote genuine sustainability in the finance industry. In the US, the SEC revised the Investment Company Act of 1940 to require that at least 80% of ESG funds meet their stated objectives. 

Meanwhile, Hong Kong, as the self-proclaimed leader in green finance, calls for stringent regulations, including volume targets and bans on fossil fuel financing to underscore the urgency of addressing greenwashing. Hong Kong lacks a green finance plan, leaving stakeholders confused about the amount of green money available to meet climate goals, according to Greenpeace. No plan exists to regulate fossil fuel financing or tackle greenwashing with specialised legislation.

A cross-agency steering group is developing a roadmap for international sustainability reporting and assurance standards for financial-product greenwashing. The group involves the Hong Kong Securities and Futures Commission and Hong Kong Monetary Authority (HKMA). Last November, the HKMA published a circular for banks here, outlining worldwide requirements for green or sustainable investment products.

China, also a major player in green finance, curbs greenwashing using existing laws rather than specialised legislation. Given China’s status as a significant greenhouse gas emitter, its attempts to prevent greenwashing are of worldwide relevance, particularly given its aim to attain carbon neutrality by 2060. Despite its sizable green bond market, transparency issues exist, causing worry among overseas investors. To remedy this, China has ordered that 100% of the proceeds from green bond issuances go towards green initiatives, up from 70% previously. 

The China Securities Regulatory Commission is also aligning bond issuance rules with the China Green Bond Principles. However, state-owned businesses that issue more than half of green bonds present problems rather than solutions, with some redirecting funding to carbon-intensive initiatives. 

In finance, while national financial authorities had not issued instructions, local offices such as the China Banking and Insurance Regulatory Commission (CBIRC) in Jiangsu province had begun to encourage green finance as early as 2021. CBIRC was restructured as the National Financial Regulatory Administration in 2024. The agency encourages banks and insurance firms to enhance how they evaluate green financial institutions, and helps them to assess risks before investing or lending, adhering to national and local environmental requirements.

Furthermore, the People’s Bank of China issued its 14th Five-Year Plan for the Development of Financial Standardisation, highlighting the necessity for improving green financial standards. Regulatory initiatives against greenwashing in China include the Administration for Market Regulation enforcing advertising and unfair competition laws, with numerous instances involving misrepresentations of environmental claims. Chinese courts also intervene under unfair competition and consumer protection rules, penalising corporations that misrepresent their products as being environmentally friendly.

Meanwhile, South Korea has made tremendous progress by being the first country in Asia to execute sanctions for misleading environmental claims in advertising. A new bill is now being considered in Korea’s National Assembly to impose sanctions on firms deemed by the Ministry of Environment to have misrepresented environmental commitments. Fines as high as KRW 3 million ($2,270) may serve as a deterrent.

Indonesia’s Financial Services Authority has come under fire for classifying coal-fired power plants as green, raising concerns about greenwashing in the Indonesian banking sector. The new taxonomy, published in February 2024, revises the standards for sustainable investments in Southeast Asia’s biggest economy; Indonesia intends to achieve net zero emissions by 2060.

Notably, the taxonomy includes circumstances under which investments in captive coal plants might be considered transition activities, which has sparked criticism from campaigners who believe it could pave the way for new coal infrastructure. Mahendra Siregar, chief of the Financial Services Authority (OJK), defended the rules, emphasising a broader view of carbon emission reduction priorities.

The Monetary Authority of Singapore (MAS) has created the Singapore-Asia Taxonomy for Sustainable Finance that establishes precise rules for green and transition activities. It defines science-based and robust technical screening criteria for economic activities and projects that support Singapore and ASEAN’s environmental goals. The taxonomy defines the green and transition economy, and outlines opportunities to meet carbon emission and green plan targets. It also helps asset owners, investment managers, financial institutions, issuers, policymakers, regulators, and other stakeholders identify and allocate capital to green and transition projects. The taxonomy was informed by government agencies and the public through rounds of consultations, after which initiatives were designed by consensus.

The Australian Securities & Investments Commission (ASIC) remains steadfast in its commitment to combating deceptive environmental claims made by funds, taking legal action against violators such as Active Super, Mercer Superannuation and Vanguard Investments. 

In 2023, ASIC took legal action against Mercer Superannuation for alleged greenwashing. Mercer was accused of making misleading statements about the sustainability of its superannuation investment options. ASIC said that Mercer clients invested in carbon-intensive fossil fuels, alcohol, and gambling despite advertising bans. Mercer is expected to pay a $11.3 million penalty and disclose its wrongdoing, setting a precedent for prosecuting greenwashing in Australia’s financial industry. 

ASIC also sued superannuation fund Active Super for misleading clients about its ESG investments. ASIC claimed Active Super invested in tobacco and gambling despite excluding these segments from its portfolios. On its digital platform, Active Super had indicated the removal of high-risk industries. ASIC claimed clients invested in fund-restricted or forbidden industries. The regulator seeks declarations, penalties, adverse publicity orders, and injunctions. 

ASIC won its first greenwashing case in March 2024 when a federal court found Vanguard Investments Australia misleading with one of its ESG funds. This includes not following the fund’s fossil fuel investment ban. 

On the other side of the world, the European Securities and Markets Authority and EU National Competent Authorities have initiated a Common Supervisory Action on sustainability disclosures and investment fund sustainability risks, indicating a concerted effort to thwart greenwashing across the EU. 

Switzerland is creating legislation for sustainable products and services that prioritise contributions to stated sustainability goals over risk mitigation or performance enhancements. To prevent greenwashing, the Swiss Federal Council advocated mandating sustainable financial products to include at least one non-financial investment target that aligns with sustainability goals. These traits must be stated clearly in the documentation. Products that focus primarily on mitigating ESG risks and do not have sustainability goals will not be branded as sustainable. Financial institutions must explain their sustainability strategy and execution in a transparent manner, as well as offer consistent reports that have been independently validated. The Federal Department of Finance proposes self-regulation in conjunction with these measures as a possible alternative to further rules, with a draft to be available for consultation by August 2024.

Harnessing technology for transparency

In a climate of increasing environmental and social awareness, a reliable sustainability platform is indispensable. Such a platform provides investors and consumers with transparent and credible information to make informed decisions aligned with their values. Beyond financial considerations, a trustworthy sustainability platform fosters trust between organisations and stakeholders, promoting accountability and long-term sustainability.

Cutting-edge technologies like generative artificial intelligence (AI) enhance sentiment analysis, ensuring accuracy and reducing bias in ESG-related data. By streamlining information and filtering irrelevant content, AI may contribute to a more robust assessment of sustainability and ethical behaviors.

Combatting greenwashing requires concerted efforts from all stakeholders—regulators, financial institutions, and technology innovators. By fostering transparency and accountability, a way is seemingly being forged towards more sustainable and ethical finance in ESG initiatives.

Keywords: Sustainable Finance, ESG, Greenwashing, Greenhushing, Regulators, Asset Management, European Banks, Environmental Damage, Global Sustainability Strategy, Global Regulatory Initiatives, Technology For Transparency, Artificial Intelligence (AI)
Institution: BlackRock, UBS, HSBC, Santander, Barclay, BNP Paribas Asset Management, DWS Investment Management Americas (DIMA), China Securities Regulatory Commission, People’s Bank Of China, Jiang Su‘s China Banking And Insurance Regulatory Commission, Monetary Authority Of Singapore (MAS), Australian Securities & Investments Commission (ASIC), Vanguard Investments
Country: US, UK, China, South Korea, Indonesia, Singapore, Australia, Switzerland
Region: Asia, US, Europe
People: Larry Fink, Al Gore, Christopher Hohn, Mahendra Siregar
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