ESAs report rising greenwashing in financial sectors

08 Jun 2023 --- European Supervisory Authorities (ESAs) have revealed progress reports on greenwashing that “show a clear” increase in the total number of potential greenwashing cases across all financial sectors, including EU banks. Analysts say the findings could have ramifications on investments in the packaging industry.

The ESAs consist of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA). 

In these reports, the ESAs put forward a common understanding of greenwashing applicable to financial markets, banking, insurance and pensions. The ESAs define greenwashing as a practice where 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.

“Banks with high levels of greenwash and unsubstantiated environmental, social and governance (ESG) claims are demonstrating a lack of true understanding of what an ESG effort looks like. This will inevitably spill over into their investment decisions, and with that risk, they unfairly reward greenwashed companies,” George Harding-Rolls, campaign manager at Changing Markets Foundation, tells PackagingInsights.

“For example, a financial institution with a poor understanding of greenwashing might be unable to see through unsubstantiated green claims made by a packaging company promoting a false solution. If they choose to invest in said company, they are locking in a bad solution rather than helping to fund a good one.”

ESAs reports demonstrate an increase in the number of greenwashing cases across financial sectors.Financial impacts of greenwashing
The EBA progress report provides an overview of greenwashing in the banking sector and its impact on banks, investment firms and payment service providers. It writes that the “practices may be misleading to consumers, investors or other market participants.”

“Section three of the EBA report describes the adverse impact that greenwashing can have on the financial risks of banks and, ultimately, on consumers,” a representative from EBA tells PackagingInsights.

Greenwashing “can include all types of statements, information, symbols, logos, graphics and brand names, and their demonstration with colors, on packaging, labeling and advertising, in all media,” writes the European Commission in the EBA report.  

“Banks and financial institutions partaking in greenwashing affect all sectors, including packaging,” adds Harding-Rolls. 

The EBA calls reputational risk as likely to be one of the most prominent risks associated with greenwashing or perceived greenwashing due to growing attention to environmental issues. The EBA says greenwashing could have losses due to a drop in the market price of green-labeled financial instruments owned by an institution if these instruments are at some point not regarded as “green.”

Greenwashing may also cause a risk to financial stability. Should it appear on a large scale, or should the lack of trust impacting one or more than one institution involved in alleged greenwashing spread over to other institutions, it would potentially affect the whole market, continues the EBA.

Spreading greenwashingProducts with sustainable claims may be committing acts of greenwashing.
ESAs further highlight that sustainability-related misleading claims can occur and spread intentionally or unintentionally concerning entities and products that are either under or outside the remit of the EU regulatory framework.

Banks committing greenwashing “gives people and policymakers the idea that companies are contributing to the green transition, but since the opposite is true, this is creating a reality in which we believe that everything is going fine and that we should not be worrying, while we continue to destroy our planet. It eliminates the sense of urgency,” Lara Sarcinella, research and campaign at FairFin, tells PackagingInsights.

The materiality of greenwashing is currently perceived to be low or medium for banks and medium or high for investment firms but is expected to increase in the future.

“Banks have not (or barely) integrated into their lending policies provisions on waste prevention or circularity,” Mathilde Crêpy, head of environmental transparency at the Environmental Coalition on Standards, tells PackagingInsights.

The National Competent Authorities (NCAs) and the ESAs are working to meet expectations from stakeholders to ensure consumer and investor protection and market integrity and maintain a trusted environment for sustainable finance.

“We doubt that greenwashing will stop without strong regulation banning adverse practices. Legislation is key. Stronger provisions on clear communication and more means to enforce them are needed,” continues Crêpy. 

An EBA report says the financial sector in the EU committing acts of greenwashing can have financial risks.Need for regulation
The ESAs reports also indicate rising climate accountability. The increased public attention to climate change has led companies to be held more accountable for their environmental policies, climate impact and disclosures.

The EBA finds that several elements in current or planned EU regulations and supervisions may contribute to tackling greenwashing. These include the rules prohibiting unfair communication and marketing, several EU sustainable finance framework pieces, such as the EU taxonomy and ESG disclosures, and a set of provisions in the EBA Guidelines.

“We fear that the Green Claims Directive (GCD) will enable the most problematic claims (and easily subject to greenwashing such as made from recycled content, recyclable, bio-based, etc.) to be opted out from the GCD and will be dealt with (less effectively and stringently) as part of sectoral legislation, such as the Packaging and Packaging Waste Directive,” says Crêpy. 

Sarcinella echos the need for regulation. “In general, there should be stricter regulation and clearer guidelines on what activities are sustainable or contribute to the green transition, in addition to more transparency on the activities of companies and who finances them.”

“Packaging companies can help to counter greenwashing by fully verifying and substantiating any green claims they are making,” adds Harding-Rolls.

“Greenwashing hotspots for packaging include claims around biodegradability, carbon neutrality and plant-based plastics. Any claims related to these must be articulated and substantiated, preferably through a third party. If it sounds too good to be true, it’s probably greenwash.”

The final reports will be published in May 2024 and will consider final recommendations, including possible changes to the EU regulatory framework.

By Sabine Waldeck