Despite a desperate drive to deliver positive, genuinely sustainable outcomes, the greedy act of greenwashing remains an all too prevalent issue in the fintech and wider financial industry.
When acting sustainability restores faith in a business’s reputation, bad actors will undoubtedly seek to exploit the accolade to their own benefit; elements of which they are seeing success through the use of greenwashing in the fintech industry.
Although sustainability, and particularly environmental, social, and governance (ESG) initiatives, have become the industry’s latest rising star, it is not a new issue that companies engage in greenwashing.
The term first made an appearance as far back as 1986, when the environmentalist Jay Westerveld criticised the hotel industry in reference to their practice of encouraging the reuse of towels and hotel linen, when in fact, the hotels themselves were doing little in the way of reducing their own energy consumption and were rather attempting to save on laundry costs with the falsely-affronted initiative.
In essence, greenwashing is when a company falsifies or exaggerates the true extent of its green efforts to the benefit of its own reputation.
The need to greenwash typically derives from the urge to replicate the success of genuinely green efforts without putting in any of the leg work.
A measurable impact
Although not immediately indicative of active greenwashing, a Google Cloud report from last year exposed just how well companies are walking the walk.
Its survey of 1,491 executives across 16 countries found that as many as four in five see their company’s sustainability efforts as above average.
Yet additional results question the data quantifying this success, in that only 36 per cent of respondents actually had the tools in place to measure the effectiveness of their sustainability efforts.
With this contradiction in view, 58 per cent of executives admitted to their belief that their organisation is overstating their efforts to go green while a further two-thirds questioned how genuine some of their organisation’s sustainability initiatives are.
Altin Kadareja, founder and CEO of Cardo AI, the end-to-end data management, reporting, and analytics platform, previously told The Fintech Times how using the right mechanisms can mitigate the risk of greenwashing, offering an industry response to this issue.
These include an “increase in the reporting and data requirements,” “a framework of positive incentives” and equipping investors with the right tools, which Kadareja cites as “questionnaires, in-person meetings, dedicated software and other tools that can be used to find ESG data, identify sustainable assets, continuous monitoring of project’s alignment with the investor’s mandate.”
Stamping out greenwashing
Authorities around the world are recognising the extent of greenwashing within the financial industry just as much as the consumers they serve are facilitating the rise of sustainable practices through demand.
When companies commit and expose greenwashing, the first domino to fall is consumer trust. When companies get caught, it’s the brand’s reputation that’s on the firing line, and a targeted exposé will come at a cost of both profits and consumers.
According to research by carbon footprint management company Cogo, around 75 per cent of UK mobile banking customers want to know more about the environmental consequences of their spending.
What’s more, greenwashing trivialises initiatives that are genuine practices of ESG in action, which further undermines the integrity of those imposing their practice. Fortunately for all, regulators are meeting the dubious practice with a swift and heavy hand.
Live by the sword
Just two months after Google Cloud published its damning report last year, the Basel Committee on Banking Supervision outlined its principles for a common baseline. All banks and supervisors in Basel Committee member jurisdictions should implement corporate governance, internal controls, risk assessment and management, and reporting ‘as soon as possible’.
A few months later, Martin Rohner, executive director at the GABV, a global network of value-based banks, urged the financial sector in attendance at November’s COP27 conference in Egypt to produce tangible, transformative results on ESG, saying that efforted must “be underpinned by a clear connection to the values that guide the overall business, otherwise they cannot be genuinely transformative.”
Around the same time, the UK’s Financial Conduct Authority (FCA) continued to apply pressure on investment managers with new requirements for funds to disclose exactly how they meet the criteria of being environmentally friendly.
Likewise, the Advertising Standards Authority (ASA) issued a ban on two of HSBC‘s adverts promoting its investment campaign for failing to disclose the bank’s own negative contributions to the climate.
Over in the States, the Securities and Exchange Commission (SEC) clamped down on Goldman Sachs Asset Management with a $4million fine for its lax approach to practices and policies attaining to its ESG investments.
The US watchdog has extended its campaign of greenwashing retribution to various sectors last year, including mining companies and health insurance distributors.
An end to greenwashing?
It’s clear that regulators have greenwashing on their radar and they will confront any evidence of the practice head-on. Industry leaders are increasingly focusing on delivering solutions that promote total transparency and compliance with the law due to this growing no-frills approach.
This includes the launch of the Payment Association‘s ‘Project ESG’ and Google Cloud’s Point Carbon Zero programme as well as the rise of ESG-inclusive sandboxes to encourage the development of targetted solutions.
Initiatives like these are likely to increase participation in climate-friendly activities. However, it will ultimately be the responsibility of both regulators and consumers to determine the place of greenwashing in the future of the financial industry.