What is Greenwashing?

Introduction

There is a fair degree of consensus that in order to prevent the worst climate damages, global net emissions of carbon dioxide need to fall by about 45 per cent from 2010 levels by 2030, reaching net zero around 2050. To curb the adverse effects of global warming, the Intergovernmental Panel on Climate Change recommends limiting the global temperature increase to 1.5°C by the end of the 21st century, which implies the need to achieve carbon neutrality by mid-century. Consequently, urgent policy action to reduce carbon emissions has become an important priority for policy makers.

The concept of green finance has entered the spotlight to support the transition towards carbon neutrality. Green finance is the flow of money from the public, private sector, or non-profit sector, that funds sustainable investment projects that tackle climate change, rebuild natural ecosystems and support jobs in green sectors (Gov.uk). An important instrument in green finance is green bonds. The differentiating element of green bonds compared to other bonds is that the proceeds are earmarked to support environmentally friendly activities. To be labelled as a green bond, issuers must identify environmentally themed projects and establish internal mechanisms that allow it to effectively track and allocate proceeds from the labelled bond to eligible projects and assets. The eligibility requirements for the issuer’s green projects and assets will also depend on the set of green definitions, or taxonomy, that the issuer is using. The choice of taxonomy has a major impact on which projects and assets will be ”green enough’ to be associated with a green bond.

Issuers of green bonds, which include governments, municipalities, corporations and financial institutions, utilise the proceeds from the issuance to support projects such as renewable energy infrastructure, energy efficiency improvements, sustainable transportation and climate change mitigation and adaptation measures. The green bond market size is valued at USD525 billion in 2024 and is expected to reach USD1,030 billion by 2031, exhibiting a compound annual growth rate of 10 per cent from 2024 to 2031. As the market for green bonds grows, concerns arise as to whether green bonds actually invest in green projects, and the question of whether companies instead engage in greenwashing, mispresenting the extent of their green investments, is an important concern for both academics and practitioners.

Banks also play an important role in the transition to a low-carbon economy, as they are responsible for financing many of the projects that contribute to greenhouse gas emissions. As a result, there has been growing interest in sustainable finance and environmental, social and governance (ESG) investments. As with green bonds, questions arise as to whether some banks engage in greenwashing by claiming to be environmentally responsible while continuing to fund fossil fuel projects and other environmentally damaging activities.

The purpose of this blog is to explore the topic of greenwashing, examine what is being done to combat greenwashing and take stock of regulatory developments.

What is greenwashing?

Greenwashing is an amorphous concept that varies by product, service, regulator and jurisdiction. Greenwashing is generally understood to be either the practice of making misleading or exaggerated ESG claims; or including information within environmental statements regarding the sustainability of an organisation’s business practices, products or services that overstates green transition achievements (and achieves marketing gains). The term greenwashing was first used by Jay Westerveld in the 1980’s and implies any dishonest practices used by businesses to represent themselves as more sustainable either by giving a false impression or providing misleading information as to the sustainability of a product/service. Greenwashing presents a significant obstacle to tackling climate change. But there is no harmonised and global definition of greenwashing.

According to the UK’s Financial Conduct Authority (FCA), greenwashing is “marketing that portrays an organisation’s product, activities or policies as producing positive environmental outcomes when this is not the case”. The International Organisation of Securities Commissions labels it as an attempt to capitalise on the growing demand for environmentally sound products as “the practice of misrepresenting the sustainability-related features of investment products”.

The European Supervisory Authorities (ESAs) understand greenwashing as a practice whereby sustainability-related statements, declarations, actions or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product or financial services. This practice may be misleading to consumers, investors, or other market participants[1]. Based on the ESAs’ definition, greenwashing can be intentional or inadvertent. This definition is in stark contrast with some arguments from market participants that argue unintentionally misleading a consumer in respect of sustainability-related claims should not constitute greenwashing. To better understand the scope of greenwashing, the ESAs have identified a number of core characteristics of greenwashing.

Sustainability-related claims can relate to any aspect of an entity or product, including governance, strategy, objectives, targets, metrics, and performance. Firms should therefore be aware that all aspects of their disclosures and marketing materials bear a risk of greenwashing to the extent that sustainability-related claims are made, and regardless of whether specific ESG requirements apply. The lack of definitional precision risks the sustainability-linked claims of banks and financial institutions as being treated as greenwashing by some, but not all, regulators.

Despite the variations in definitions, a common theme that can be settled is that greenwashing is about misrepresentation, misstatement and false or misleading practices in relation to ESG credentials. It is the practice wherein companies make false or exaggerated claims about their environmental responsibilities by selectively disclosing information or presenting misleading narratives. By misleading the public to believe that a company or other entity is doing more to protect the environment than it actually does, greenwashing promotes false solutions to the climate crisis that distract from and delay concrete and credible action.

It is worthwhile making the distinction between greenwashing and criminal activities such as fraud, environmental crime and the laundering of the proceeds thereof. While it is likely that fraud and other financial crimes are combined with misstatements of green activity, the term ‘greenwashing’ is not an umbrella for all kinds of ESG-related non-compliant and criminal activities. It is imperative in any risk assessment to take into consideration whether the risks under consideration are reputational or legal (both institutional and individual), or both – and whether potential liabilities arise under civil, administrative or criminal law.

The practice of greenwashing lowers trust and it can lead to significant follow-on risks, particularly through damage to the organisation’s reputation, but also from civil litigation and administrative penalties. Consequently, addressing this risk is a pressing need for banks and financial institutions because it is becoming an increasing source of litigation and regulatory scrutiny.

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Drivers for greenwashing

To cut carbon emissions nearly by half by2030 and to reduce to net zero by 2050 has created a large demand for financing instruments that support this transition. Against this backdrop, greenwashing is a side effect that can occur in any stage of the sustainable finance value chain. Greenwashing undermines the credibility of efforts to reduce emissions and to address the climate crisis. Deceptive marketing and false claims of sustainability will mislead consumers, investors and the public. In turn, this will hamper the trust, ambition and actions needed to transition to a low carbon economy.

Greenwashing can be driven by various factors such as competition, regulatory requirements, non-governmental organisations (NGOs) and media scrutiny, imperfect information or by the entity itself. The fear of being left behind by competitors or pressure from consumer and investor may force a firm to make environmentally friendly statements or claims to offer environmentally friendly products or services that are not true. As more and more minimum regulatory requirements come on stream, the lack of appropriate supervision can also lead to greenwashing. Additionally, inconsistencies or lack of a relevant legal framework as well as a perceived low likelihood of penalty or sanction can contribute to greenwashing.

Increased scrutiny from NGOs and the media may create an adverse incentive for firms to focus their communication on sustainability while ignoring or downplaying the environmentally harmful part of their business. Limited or imperfect information about an entity’s environmental performance may result in greenwashing. An entity’s internal structure, ethics and governance can also be a driver for greenwashing. An entity may have job titles or internal structures created with terms like ‘ESG’ or ‘sustainable’, or products labelled as green or sustainable, without proper sustainable policies to back them. A lack of proper ethics code, clearly allocated responsibilities and standards of conduct can also contribute to this.

Clearly defining and better understanding of greenwashing is a key step towards tackling its causes and drivers. The European Banking Authority’s Progress Report on Greenwashing Monitoring and Supervision noted that the drivers for greenwashing are multifaceted and complex, including:

• a considerable increase in demand for products with sustainability features;
• the competitive drive for companies to improve their sustainability profile, including sustainable product offering;
• a fast-evolving regulatory landscape;
• inconsistencies or lack of clarity of certain regulatory provisions and concepts, data quality and availability issues;
• lack of expertise and skills within the financial system; and
• financial literacy gaps.

Why it is important to combat greenwashing

Investors are increasingly being drawn to green bonds due to their potential for positive environmental impact and alignment with socially responsible investment strategies. The green bond market not only provides issuers with a viable funding avenue for sustainability projects but also allows investors to contribute to the global transition towards a more sustainable and low-carbon future. Banks play a critical role in financing companies’ decarbonisation effort, including in high-emission industries. The asset management sector is also proactively marketing ESG funds. Given that ESG funds may also misrepresent their ESG criteria, regulators worldwide are clamping down on these incidents of greenwashing.

Indeed, the risk of greenwashing has increased considerably as consumers/investors proactively seek ‘sustainable’, ‘green’ and ‘planet-friendly’ products/investments. This has led regulators, consumers and environmental groups to increase their scrutiny of such products with the objective of combating greenwashing. Greenwashing is now being addressed through the filing of regulatory complaints and lawsuits as well as through other actions such as, for example, through critical media attention given to producers and funders of single-use plastics.

By implementing policy and procedures to mitigate the risk of greenwashing, banks and financial institutions will safeguard themselves from regulatory fines and penalties. At the same time, policymakers and regulators should exercise better oversight and control over products that are labelled as green. Towards this goal, they are likely to take steps to determine that product details in all external communications match their stated sustainability attributes. Firms could therefore face greenwashing accusations if either the underlying assets or the use of proceeds from its sustainable investment products are found to be environmentally unfriendly or unimpactful. To this end, it is imperative that banks and financial institutions implement adequate risk and control frameworks to mitigate the climate and sustainability risks, including consideration of greenwashing risk. This can be done by having controls for new product approval processes, new transaction approvals and review of marketing materials.

What is being done to address greenwashing

Policymakers and regulators in many jurisdictions are aiming to enhance the disclosure requirements on products with a green label. This is to ensure that consumers and investors have sufficient information to evaluate the characteristics of products that firms claim as green or sustainable.

In the UK, agencies that distribute sustainability-related information to consumers must ensure that they communicate sustainable investment labels and accompanying disclosures in a clear and substantive manner. For example, a bank passing along information about a green bond will also need to disclose how the bond’s investment strategy and its proceeds will be used to fund environmentally friendly or low-carbon projects.

On disclosure requirements, the UK FCA published the PS23/16: Sustainability Disclosure Requirements (SDR) and Investment Labels in 2023, which contained a set of new rules to tackle greenwashing. The FCA’s proposed anti-greenwashing regulations are designed to target asset managers and other FCA-regulated firms. It requires, at the bare minimum, that firms do not make unsubstantiated sustainability claims. It ensures that the distributors of products and services provide retail customers with the information they need to make informed decisions. Distributors of sustainable finance products, such as green lending products (e.g., green mortgages or loans), or those providing retail clients with investment advice, will be subject to these new rules. Additionally, it has a broader impact of ensuring that manufacturers of financial instruments need to design them to meet the needs of their target client. As banks play a significant role in arranging debt financing for low-carbon infrastructure through arranging or underwriting green bonds, they run the risk of passing on greenwashing to the funds their products end up in.

In December 2023, the Singapore-Asia Taxonomy was launched by the Monetary Authority of Singapore at the United Nations COP28 climate conference in Dubai. The taxonomy established the criteria for banks and financial institutions on the financing of green business activities, and transitional activities that are currently not green but are on a pathway to net-zero emissions. This will reduce the risk of green or transition-washing by banks and financial institutions and ensure that transition activities will meet the green criteria over time. The Competition and Consumer Commission of Singapore is developing a set of guidelines to provide greater clarity to suppliers on the environmental claims that could amount to unfair practices under the Consumer Protection (Fair Trading) Act, after a study found that one in two products sold online overstated their environmental claims.

In Switzerland, there is no legal definition of the term greenwashing. However, the Swiss Bankers Association, which represents the banking sector, is pushing for self-regulation rather than be subject to tighter government oversight of sustainable finance through government rules. Switzerland, a huge centre for asset and wealth management, accounted for sustainable investments totalling around CHF1.6 trillion (USD1.79 trillion) in 2022, according to Swiss Sustainable Finance, an industry association. There are no figures on Swiss cases of greenwashing.

The European Union’s Green Claims Directive (GCD) is intended to reinforce regulatory measures against false or misleading environmental claims, commonly known as ‘greenwashing’, from hindering the green transition. EU legislators are proposing a ban on false environmental claims as a measure to combat greenwashing. Under the proposed GCD rules, businesses will be required to substantiate explicit environmental claims before publication, providing consumers with transparent, reliable and valuable information. The Directive outlines specific requirements for substantiating explicit environmental claims — for example, by requiring lifecycle considerations, disclosing scientific evidence and explaining any deviation from law or industry and sector standards.

Information must be disclosed together with the product, through use of a URL or QR code. In general, the disclosure information is expected to cover:

• environmental aspects, impact and performance included in the claim;
• relevant EU or international standards used as part of the substantiation;
• how improvements related to the claim are achieved;
• information on greenhouse gas off-setting;
• underlying studies or calculations used to assess, measure and monitor impacts, aspects or performance;
• certificate of conformity; and
• in case of comparative advertising, appropriate comparative data.

Firms are required to consider very carefully the relative significance of the environmental impacts, aspects or performance. Consequently, they should not publish environmental claims without considering the balance, weight and precision of those claims. Moreover, the GCD defines mandatory governance criteria for environmental labels. These include requirements that the governance model be transparent, stakeholders be considered, and an on-going process be established for evaluating complaints, disputes and handling of non-compliance with the requirements of the labeling scheme. Additionally, environmental claims and labels will also be subject to third-party verification. The aim of the verification process is to assess compliance and not a guarantee against civil liability or scrutiny by authorities. Public authorities are expected to conduct regular checks of companies’ compliance with the regulation and publish public reports on the results.

The GCD also aims to provide an appropriate procedure for appeals and complaints for persons, organisations and others who are negatively affected by misleading marketing. In terms of public sanctions, companies found to be non-compliant may face the following:

• fines;
• confiscation of revenues; and
• temporary exclusion from public procurement.

Based on developments in Singapore, the UK and EU, the steps being taken to fight greenwashing can be summarised as follows:

• adopt general consumer protection laws or strengthen existing ones against misleading or false commercial practices;
• provide guidelines as interpretative resources to support businesses in drafting an environmental claim as well as serve as a framework for policies and provide interpretative guidance for enforcers;
• enhanced legislation to include environmental claims; and
• banning the use of vague environmental claims to help avoid misleading consumers into believing that a product or service is better for the environment than it really is. 

Having legislation and relevant laws and guidance in place is the first step in combating greenwashing. Other key drivers for success are to: (i) develop and adopt adequate enforcement mechanisms in a structured, proportionate and diversified sanction regime; (ii) create a national authority with the power to enforce administrative sanctions, impose fines and/or prohibit certain types of advertising; (iii) have a strong civil society by encouraging the empowerment of consumers and environmental protection associations, and facilitate a widely accessible right of action and create a dedicated type of class action as well as effective mediation processes; and (iv) foster co-operation between all actors to develop and implement proper and effective legislation and regulations.

Policymakers and regulators are beginning to lay out the grounds on which they will take action to prevent greenwashing. Regulatory and enforcement actions relating to accusation of greenwashing could have major impacts on a firms’ financial and reputational standing, including through:

• loss of shareholder trust;
• an adverse impact resulting in a competitive disadvantage; and
• increased risk exposure to liability claims.

With the heightened scrutiny around green products and services, and the higher risks associated with both financial and reputational loss, firms have a material interest in ensuring greenwashing risks are mitigated in their governance and risk management frameworks. Banks which are arranging deals for issuers for sustainability bonds or loans will need to examine their current risk architecture to ensure they are identifying, assessing and managing the risk of greenwashing.

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Conclusions

Greenwashing presents a significant obstacle to tackling climate change. Greenwashing is generally understood to be either the practice of making misleading or exaggerated ESG claims; or including information within environmental statements regarding the sustainability of an organisation’s business practices, products or services that overstates green transition achievements (and achieves marketing gains). Greenwashing can be driven by various factors such as competition, regulatory requirements, NGOs and media scrutiny, imperfect information or by the entity itself. Policymakers and regulators are beginning to lay out the grounds on which they will take action to prevent greenwashing. Regulatory and enforcement actions relating to accusation of greenwashing could have major impacts on a firms’ financial and reputational standing.

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[1] ‘Entities’ are understood to be financial or non-financial undertakings or intermediaries that manufacture, issue and/or distribute financial products; ‘financial product or financial service’ is used to cover all financial instruments, securities and investment, banking, insurance and pension products as well as all financial services relevant for each sector considered; ‘consumers’ encompasses all retail and professional customers/clients’ ‘entities’.