By:  Jacqueline Poh
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Over the last decade, companies and investors have come to pay more attention to environmental concerns, often with a goal of offering “green” products or making “green” investments. But the companion of green is often what’s known as greenwashing. In some countries, regulators are trying to clean up the field, launching investigations and levying fines. They have the backing of some advocates of environmentally minded investing worried that greenwashing’s taint may undermine the field.

1. What is greenwashing?

It’s the use of misleading labels or advertising to create an undeserved image of environmental responsibility. Here are some eamples:

• In December, the UK’s antitrust regulator began an investigation of Unilever Plc, the maker of Dove soap and Cif cleaner, for allegedly overstating the environmental qualities of certain products.
• Fashion companies Asos and Boohoo and airlines such as Air France-KLM, and Deutsche Lufthansa AG were told by regulators to discontinue misleading ads that made air travel seem more eco-friendly than it is.
• In investing, the UK’s Financial Conduct Authority rolled out a framework in November designed to protect retail investors from misleading claims by firms with so-called ESG funds — where investment decisions are shaped by environmental, social or governance factors.
• In the US, Deutsche Bank AG’s DWS asset management arm agreed in September to pay a total of $25 million to settle Securities and Exchange Commission probes into alleged greenwashing and anti-money laundering lapses. The penalties included $19 million for “materially misleading statements” about how the bank incorporated ESG factors into research and investment recommendations.

2. What’s the incentive for greenwashing?

The ultimate attraction is the favorable image companies project across to clients, investors, shareholders, lenders and even potential employees. But different players have different reasons for exaggeration. When companies fudge on something they’re selling, it’s because they want environmentally minded consumers to be drawn to their products. When they’re borrowing money, they may be chasing a “greenium” — the money they can save by qualifying for the better terms lenders might extend to green or social projects or to ones with ESG goals. Brazil raised $2 billion in the bond market in November 2023 with proceeds earmarked for green and social work, and the debt was priced lower than initial guidance – meaning the Amazon forest nation is paying lower interest rates, compared with a conventional bond. And investment managers might put a greener label than is warranted on a fund to draw in more assets.

3. How big a problem is it?

In 2022, Bloomberg News analyzed more than 100 bonds worth almost $70 billion tied to issuers’ ESG credentials that were sold by global companies to investors in Europe. The analysis found that the majority were tied to climate targets that were weak, irrelevant or even already achieved. Some companies promised to do no more than maintain their existing ESG ratings. And some of the fastest-growing areas of ESG financing involve so-called sustainability-linked loans (SLL) (and similar bonds) in which the connection between environmental labels and environmental goals can be tenuous.

4. How does sustainability-linked debt work?

Sustainability-linked bonds and sustainability-linked loans are signed with commitments from borrowers to achieve certain environmental or social targets, but those goals may be changed in an increasing number of cases. The more flexible agreements even allow issuers to adjust those targets under certain conditions without incurring a penalty. Issuers argue that they have to look for ways to cope with increasingly volatile markets in which key ESG parameters such as energy prices become harder to predict. Then there’s the “sleeping” sustainability-linked debt where financing has an ESG label but with no immediate sustainability targets. Other approaches push responsibility even further out: Bank of China Ltd.’s so-called re-linked bond sold in 2021 is tied to the performance of a pool of sustainability-linked loans made to its clients — that is, not to anything BOC is or isn’t doing in ESG terms, but to the ESG performance of the clients who have taken out those loans.

5. Who’s checking up?

There are dozens of ESG rating and data providers globally, which can provide some assurance that companies and debt issuers are doing their part in sustainability. But private ratings systems can be unreliable and corporate reporting is spotty and hard to compare. All of this greenwashing detective work would be easier if investors and the public had a standardized approach and a robust set of data to compare. Here’s some of what governments and other organizations are doing:

• Hong Kong, Japan, South Korea, India, Singapore, the UK and EU have issued or proposed rules for ESG score providers, though the rules are only mandatory in the EU and India. The UK Financial Conduct Authority, meanwhile, has unveiled its Sustainability Disclosure Requirement ensuring investment products are accurately labeled or presented.
• The US SEC is working on getting companies to report on their greenhouse gas emissions and other climate matters.
• The EU enforced the Corporate Sustainability Reporting Directive in January 2023 which requires companies to disclose risks and opportunities arising from social and environmental issues. For the debt markets, the European Council adopted a green bond standard in October 2023 that specifies where proceeds will be invested and which activities are aligned with the EU taxonomy.
• Financial bodies, including the International Capital Market Association which oversees the international debt capital markets, and global loan associations have drafted guidelines for ESG debt such as sustainability-linked instruments, green and social financing.

6. Is it just environmental misconduct that’s considered greenwashing?

No. Social and governance aspects have grown to be just as crucial as companies’ environmental efforts, especially since the #MeToo and Black Lives Matter movements began making an impact on consumers’ spending. Many corporations are using their annual sustainability reports to showcase how fair they are in equality employment or what they did to improve employee wellbeing. Given that some of these goals are hard to measure in areas where little data is available, there’s a risk in overstating the results. Of the $1.4 trillion of sustainability-linked debt with disclosed ESG goals, only $352 billion was tied to social objectives, according to BloombergNEF data.

7. How can I avoid investing in greenwashing?

Here are some questions to ask yourself:

• How ambitious are a company’s goals? Are they integral to its core business, or just superficial commitments? Is the company just promising to do something it would be doing anyway?
• How specific is the timeframe? Are the goals set annually, or in a way that allows for easy monitoring?
• Are companies looking at the full “scope” of their emissions, including the carbon released when customers use their products?
• How much do their plans rely on the kinds of carbon “offsets” that have come under fire for not living up to their promises of environmental benefits?
• Is there a way to check on companies’ claims, such as in an evaluation by an impartial ESG data- or ratings-provider?
• Is a company making information about their sustainability goals accessible in a transparent and timely way?