The European Banking Authority has warned of widespread greenwashing in financial services with banks overstating sustainability efforts.
As the race to net zero accelerates, the greenwashing in banks’ climate credentials is leading to calls for greater accountability for FS firms’ environmental policies. Steve Round, co-founder of SaaScada, argues that banks can no longer cherry-pick their sustainability credentials – they must build the foundations for comprehensive ESG reporting.
Round is an expert in sustainable banking as the Chair of the Governing Board Forum of the Global Alliance for Banking on Values – a network of 70 independent banks globally, using finance to deliver sustainable economic, social and environmental development.
“In the absence of regulation, we’ve long-lacked clear guidelines on how to measure the sustainability of investments and financial products, making it easier for greenwashing to slip under the radar,” Round said. “But with EU regulators cracking down on sustainability misrepresentation, FS firms will be forced to keep up. Those that fail to do so could risk costly fines and reputational damage in the future.
“FS firms must make it a priority to build the foundations needed for comprehensive reporting of the environmental and social impact of their operations. But, many struggle to gain a picture into their impact due to a lack of reliable and accurate data for ESG reporting.
“The best way the sector can tackle this problem is by defining clear metrics and data categories that should be logged in ESG reporting and adopting the tools to gather this data effectively. Only then can firms address greenwashing and build sustainability into business models.”
Taxonomy aims to beat greenwashing
Action on climate change is increasingly being driven and enforced by regulation with new laws aimed directly at finance and investment that will drive and support the net zero economy. The new EU Taxonomy for Sustainable Activities aims to provide clarity with a legal framework designed to beat greenwashing.
Set to become law in 2023, the EU Taxonomy for Sustainable Activities combines many different regulations, financing mechanisms and subsidy schemes and is designed to direct investment in line with the European Green Deal – the EU’s strategy for achieving carbon neutrality by 2050.
The taxonomy classifies what activities can be marketed as sustainable investments and provides a standard definition throughout the EU. Rather than having to assess what is sustainable from scratch, investors can simply refer to the taxonomy.
To be deemed as sustainable, an economic activity must contribute to various climate objectives. These range from climate change mitigation to sustainable use of natural resources and biodiversity restoration and include zero emissions transportation and afforestation. There is a broad consensus on most of the activities classified as sustainable.
If an activity is not on the list, then it is classified as unsustainable and its access to investment is limited.