The ‘greenwashing trend’- EU warnings that you might want to look into

The ‘greenwashing trend’- EU warnings that you might want to look into

The ‘greenwashing trend’- EU warnings that you might want to look into

When it comes to financial institutions, greenwashing becomes a priority issue in most jurisdictions.

European Union (EU) authorities have found extensive evidence that several financial institutions such as banks, insurers, and asset managers are overstating their climate credentials. In a recent study of nearly 150 financial institutions conducted by the European Commission, it was found that almost 53 percent of them provided “vague, misleading or unfounded information on products’ environmental characteristics”. The unverifiable claims, however, could be penalised under Unfair Commercial Practices Directive. The European Baking Authority recently mentioned that there had been a “clear increase” in EU banks and various other financial institutions misrepresenting sustainability efforts. Experts have weighed their opinions and contempt for the existing laws and regulations not being strong enough. Let us first take a look at what greenwashing is.

What is Greenwashing?

Greenwashing is a term first used by Jay Westerveld in the 1980s and could be explained as a dishonest practice used by business enterprises or any financial institutions to represent themselves as sustainable by providing incorrect information, misleading claims, or false impressions as of the sustainability of their services.

Why is greenwashing a matter of concern?

Climate concerns and sustainability are pressing issues that require global attention. When it comes to financial institutions, greenwashing becomes a priority issue in most jurisdictions. The focus on greenwashing by consumers, regulators, and climate activists has increased in growing numbers as they seek planet/climate-friendly products and services. This general concern for the planet is being used by several financial institutions and enterprises to pose as environment-friendly but at the same time link to projects that threaten sustainability practices.

According to the authorities, a bank portrayed its investment as environmentally friendly while investing in airport projects. Another financial institution described itself as sustainable and was linked to financing a company building on oil sand pipeline amidst receiving opposition from indigenous people. EU’s warning came when campaigners were following a lawsuit against BNP Paribas, the euro zone’s biggest bank. BNP Paribas ultimately decided to cease financing the new gasfield project while promoting its support for cleaner energy sources. European Insurance and Occupational Pensions Authority warned that greenwashing has a “substantial impact” on customers of pension products and insurance, reports FT.

The European Union for years has been trying to bring transparency into the phenomena of growth in funds and other financial products which are labelled as “green” and control marketing statements on the company’s climate sentiments. Lawmakers came in support of the rules that will tie the executive pay to the companies’ efforts in addressing the environmental abuses and human rights violations happening in their supply chains but the application of the same to the financial institutions remained in question.

The MEPs voted in approval of a significant portion of directors’ pay connected to the environmental and social diligence of the corporate and thus making climate transition plans compulsory for companies.

How will consumers know if financial institutions make legitimate green claims?

Competition and Markets Authority(CMA) published generic guidance on sustainability goals. CMA’s Green Claims Code focuses on protecting consumers from misleading sustainable claims or greenwashing. US Securities and Exchange Commission (SEC) is focusing on all ESG issues. The ESG task force will prioritise the investigation of ESG-related misconduct.   

The vote however was an important step forward in the European Union’s sustainable finance policy architecture, stated Elise Attal head of EU policy at the UN Principles for Responsible Investment. But the extent to which the financial sector will be affected remains vague. The directive was designed to force the companies to be accountable for environmental and human rights issues in their supply chain to avoid disasters similar to the collapse of the Rana Plaza factory in Bangladesh in 2013 which killed more than 1,000 workers.

This also creates several unnecessary burden on companies as it has been contested throughout the legislative processes. Financial Times also revealed that the effort by the companies to cut reporting requirements for organisations by a quarter had already reduced the sustainability reporting rules at the draft stage. It must now be negotiated with the EU’s 27 member states before becoming law and has a possibility of facing further rollbacks from conservative lawmakers.                

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