It’s no wonder that environmental, social, and governance (ESG) concerns are keeping bank C-suites awake at night. Once just an ethical concern, banks now have to tread cautiously in the marketing of their ESG credentials as regulators on both sides of the Atlantic clamp down on greenwashing.
A May 2023 progress report from the European Banking Authority (EBA) on greenwashing and monitoring supervision highlighted the growing potential for greenwashing in banks, investment firms and payment service providers.
Heightened public attention to climate change means companies are being held to account for their environmental policy disclosures, stated the report, and both European and US banks are feeling the heat.
In May 2022, the US Securities and Exchange Commission (SEC) charged BNY Mellon Investment Adviser for misrepresenting ESG considerations in certain investment decisions. BNY agreed to pay a $1.5m penalty. In the same month, German police raided the offices of asset manager DWS and its majority owner Deutsche Bank in response to greenwashing allegations.
Regulatory attitudes about misrepresented sustainability claims are hardening in the UK, too. Last year, the Advertising Standards Authority for the first time banned two sustainability-focused adverts issued by HSBC. Now, the Financial Conduct Authority (FCA) has proposed new rules to tackle greenwashing, which are due to be finalised in the coming months.
Alongside these efforts, the UK’s Competition and Markets Authority announced plans earlier this year to better understand how consumer protection legislation can be used to tackle misleading environmental claims that affect consumers.
It can be tempting to push a product’s sustainable credentials, but it is vital to take a measured approach to build trust
In the EU, the proposed Green Claims Directive is designed to tackle greenwashing. The draft legislation forms part of the EU’s Circular Economy Action Plan and, more widely, the Green Deal, which aims to transform consumer behaviours to support a more sustainable economy. The law would apply to green claims about the environmental impact of a firm’s products or business.
And in the US, the SEC is expected to follow the EU’s lead. The regulator currently mandates climate disclosures encompassing emissions from both upstream and downstream activities.
Given the growing market for financial products linked to ESG criteria, customers and regulators alike are making informed decisions about firms based on how well they are perceived to be doing, says Richard Andrews, partner and head of ESG at KPMG in the UK.
“It can be tempting to push a product’s sustainable credentials to cater to this market, but it is vital that those in financial services take a measured approach to build trust,” he adds.
Risk must be seen through a broad lens
Mr Andrews advises banks to conduct a greenwashing risk assessment through a firm-wide, product and client lens to understand where the greatest risks lie and where mitigations or stronger controls may be needed. To date, he says, there have been mixed approaches across the banking sector.
“Some may still be looking at it through a narrow lens of how they present themselves in marketing, while others will be reviewing their overall bank-wide marketing and that of specific products, looking not just at images but into the subtleties around ESG-related wording and its meaning,” he says.
“This means they will need to put in the work to understand what greenwashing risks they are exposed to and whether they are within their preferred risk appetite. If not, they will need to change behaviours and update processes to prevent any occurrences,” continues Mr Andrews.
Banks should not rely purely on disclaimers, says Rita Hunter, co-head of sustainable finance and investment at law firm Hogan Lovells, pointing to the importance of firms substantiating their claims with robust data and ensuring clarity with consumer testing. This is crucial in regard to the use of key terms in marketing such as ‘ESG’, ‘green’ or ‘sustainable’, on which the FCA has proposed a tightening of restrictions.
Mr Andrews says that banks must not overstate what they are doing and ensure that the chosen approach is backed up by evidence, including how it fits into a wider net-zero strategy and transition plan.
But an assessment of the true scale of greenwashing may be hindered by ESG’s subjective nature, according to the Jeffries Financial Group. Different methodologies give varying results and, as recently as 2021, no standardised framework for measuring and reporting ESG data existed. The EBA raises similar issues whereby stakeholders say there is no clear definition as to what can be labelled ‘transition finance’.
Mr Andrews points to a growing consensus on how understanding and defining greenwashing can be improved across the sector, looking to the European Supervisory Authorities, which have expanded definitions to consider both intentional and unintentional misleading activities around ESG.
“In the UK, we need to see the impact of the Sustainability Disclosure Requirements, and the anti-greenwashing rules within these,” he adds. “This should provide the FCA with a greater role in calling out and enforcing against misleading ESG marketing practices.”
Are FCA clampdowns coming?
Existing frameworks can already provide a sufficient legal basis for environmental claims, the EBA told The Banker, referring to the Unfair Commercial Practices Directive and the Markets in Financial Instruments Directive, among other consumer and investor protection frameworks.
As part of their final report on greenwashing to be delivered by May 2024, the EBA will assess whether the focus should be on ensuring proper enforcement and implementation of existing frameworks in the context of ESG, or whether new legislation should be considered, said an EBA spokesperson.
Given the current landscape of ESG-related regulation, which is still in its infancy, Ms Hunter says more regulation will likely have unhelpful consequences for banks, as well as for EU and UK regulators’ ability to assess banks’ marketing of their ESG credentials.
The market is already saturated with regulation, she says. As regulators increase efforts to eliminate misleading ESG marketing, Ms Hunter speculates that FCA clampdowns on greenwashing concerns could be on the horizon.
