What is ‘Greenwashing’ and why has the term become so prominent in the finance industry?

Greenwashing as an issue has grown increasingly prominent over the last decade and will continue to grow in relevance during the transition towards a more environmentally friendly economy.

First, it is important to establish what Greenwashing actually is. In short, it can be defined as ‘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 product/service. In recent years all businesses are wanting to appear more ‘green’ or responsible and sustainable. In particular due to the importance of public perception in the era of social media with information so readily available, ‘looking good’ has never been more important. Consequently, some have viewed it more as a box-ticking exercise, rather than actually adjusting policy or practice.

There are two examples that illustrate greenwashing effectively. One of the most well-known is the Volkswagen emissions scandal in 2015. Following a marketing campaign that promoted VW’s ultra-low emissions on diesel cars, it was revealed that they had been “cheating” the emissions tests polluting far more than they announced by using a ‘defeat device’ to alter results. This device was fitted on over 11 million cars globally. More recently in 2021, the Wall-street Journal revealed that the Deutsche Bank investment arm (DWS) had inflated its ESG credentials in the 2020 annual report, causing its stock to fall by 13.7%. Whilst DWS denies these claims the situation depicts the importance and influence of ESG within the finance industry.

In the finance industry, there has been a massive increase over the last decade in ‘sustainable investing’, driven by the necessity to deliver on climate goals from the COP summits and a general consumer consensus demanding more ESG-minded businesses. Furthermore, climate funds or investments are now no longer always separate, as green credentials are now important across a whole investment portfolio. This shift has been accelerated further by covid-19, demonstrated in the rise from 5% of corporate earning calls mentioning ESG, to over 20% in 2022. Moving forward there will be even greater responsibility and focus on the issue of greenwashing in the finance industry with a growing amount of regulation on the issue.

Furthermore, employees across the sector will now require a greater education on the issue, learning how to identify it and comprehend its ripple effects of it. These impacts are broad ranging but can be summarised in four main consequences. Firstly, investor confidence as if products or funds are packaged in a certain way and then this is ultimately shown to be false, trust in these areas diminishes very quickly. Secondly, it can result in a failure to deliver on client goals, if they are looking for investments with high ESG criteria. Thirdly, there is a reputational risk associated with failure to identify these problems or ‘greenwashing’ themselves. Finally, the potential for regulatory fines, which will become increasingly common as frameworks on issues begin to be established and enforced frequently.