What is greenwashing?

When we want to invest in shares and bonds issued by sustainable companies, in securities that finance environmental or social projects (such as green bonds), or more generally in financial instruments that promote sustainability characteristics, we may encounter instances of greenwashing - a misleading commercial practice whereby products, activities, or projects are presented as more sustainable than they actually are. In other words, they are made to seem better than they truly are from an environmental, social, or governance perspective.

The European Union is currently developing new rules and oversight measures to protect us from such practices. In the meantime, it's worth understanding what greenwashing is and how it can be deceptive.

In the financial sector, greenwashing involves making claims or taking actions that do not accurately or transparently reflect the sustainability profile of an entity (such as a bank, investment firm, or insurance company), a financial product (such as shares, bonds, loans, or insurance policies), or a financial service (such as investment advice). This practice can mislead consumers, investors, and other market participants.

Who might engage in greenwashing? It could be the entity itself - the one making claims or responsible for the product. But it could also be an entity providing advice or information about the product, or even a third party such as a sustainability certification agency.

The definition above is a simplified version developed by the three supervisory authorities that oversee the financial sector in the European Union - the European Supervisory Authorities (ESAs). It is based on analyses conducted by each authority within its area of responsibility: banks (European Banking Authority, EBA), financial markets (European Securities and Markets Authority, ESMA), and insurance and pension funds (European Insurance and Occupational Pensions Authority, EIOPA).

These analyses help us better understand the phenomenon, starting with potential real-world examples.

Some examples

Let's consider banks within the EU. According to the European Banking Authority (EBA) in its preliminary report, greenwashing occurs when a bank engages in any of the following actions:
  • claims to contribute to the reduction of global carbon dioxide emissions but lends money to companies that build coal-fired power plants;
  • claims to fight deforestation but invests in a company believed to be linked to deforestation in the Amazon;
  • publicly commits to reducing carbon dioxide emissions related to its investment and financing activities but adopts an unconvincing plan;
  • communicates its efforts against climate change but omits information about its contribution to greenhouse gas emissions;
  • violates its own environmental and social policy by knowingly financing projects with a strong negative impact on the environment and society;
  • Promises to crack down on suspicious clients but then conducts business with individuals and companies involved in various crimes;
  • publicly commits to being sustainable but invests in companies involved in human rights violations;
  • states that it has not evaded taxes but is later convicted of tax evasion;
  • claims to care about employee welfare but discriminates against them or fails to protect their rights.

At the level of products or services, greenwashing is considered to occur when:

  • false information is given to clients about the characteristics, objectives, composition, or “green” scope of investment products;
  • funds are promoted as sustainable but invest in companies with a negative impact on the environment and society;
  • a label for sustainable investment is launched that allows investment in companies in the fossil fuel sector (not with the aim of making them more environmentally sustainable).

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