How to approach greenwashing risk
Panellists on the Climate Risk & Sustainable Finance Summit discuss the standardisation issues in identifying risky investments
A standardised framework is needed to provide a pathway for how the transition towards a net zero carbon emission economy can be achieved, without charlatans damaging the process with ‘greenwashing’ claims of sustainability or greenness, which cannot be backed up. Panellists from the buy- and sell-side debated this issue on the Climate Risk & Sustainable Finance Summit at RiskMinds International. They agreed that investors need to know what companies they can loan to and what specific terms like nature or climate risk actually mean.
Otherwise, in 20-30 years times a bank could get sued for lending to a coal miner without proper due diligence being performed. At the very least the practitioner themselves could get sued like ‘Big Tobacco’ was last century. There is a financial and a reputational risk attached to the greenwashing debate, especially as consumers and investors grow more aware of the ESG agenda, which maps to the Environmental, Social and Governance principles set out under the UN’S 17 Sustainable Development Goals (SDGs).
In the UK, there is already the Climate Financial Risk Forum (CFRF), explained a panellist. This brings together senior financial services representatives to share their experiences in managing climate-related risks and opportunities. Established in 2019 under the auspices of the UK Financial Conduct Authority (FCA), the CFRF is intended to drive best practice and help financial institutions identify the risks and opportunities of the emerging 21st century green economy.
The FCA’s anti-greenwashing final rulebook is also due very soon. This will restrict how ‘green’ terms can be used in future and hopefully bring order to the global transition towards net zero that is underway. The UK CP22/20: Sustainability Disclosure Requirements (SDR) regulation is specifically targeting how sustainability claims are measured and will eventually map to the global, standardised approach being developed by the International Sustainability Standards Board (ISSB). Another regulation designed to battle greenwashing is the EU Green Bond Standards (GSB). This code is designed to harmonise the European sustainable bond market and improve transparency and market integrity in this segment. However, claims about diversity, poverty reduction and other UN SDGs will go unmeasured by this and ESG ratings from data providers like Fitch or MSCI aren’t yet standardised. The best approach, according to the panel, is to use a mix of internal and external data and develop your own approach for now.
