Author: Nicholas Clark
Being “Green” or being sustainable have become popular buzzwords in recent times, where citizens are calling for higher environmental standards from banks and their investments as well as far better socially responsible practices from businesses. This means that those wishing to invest in businesses or projects, whether that be public investment from national or EU institutions or from private investors like banks, need to consider the risks involved in investing in companies/activities that might be seen to be harming the planet or causing social harm (such as providing terrible working conditions, poor wages or affecting people´s health).”
What does this mean for investors?
On the face of it, it sounds like a great thing! Who wouldn’t want investors to be more considerate about what kinds of businesses they invest in? Alas, as is often the case, things are not always that simple; especially when profits are involved and maximising those profits is a priority, as is the case with the traditional banking sector. This blog explores the practice of green washing and social washing and we will find out why this “bad” practice means we must be very careful that investors who “claim” to be investing in sustainable activities, really are! Not that they just “say” they are environmentally and socially responsible, and then go ahead and continue with business as usual, destroying the planet while often not even ensuring basic human rights!
The “mal”-practice of showing customers or the public one side of investment practices and hiding the other happens so often, it even has a name! green washing and social washing!
A clear example of a common behaviour among mainstream banks of green washing is the traditional bank, BNP Paribas. For example, they were one of the main sponsors of the COP26 conference, so they gain great visibility as supporters of sustainability; yet, paradoxically, they are one of the biggest financiers of the fossil fuels industry and of the weapon industry. They are not “deceived” by these sectors, they willingly finance them to pursue profit. Green washing in this case is this huge publicity/communication effort to sell the bank as an engaged, sustainable actor while the reality of their activity is very different.
"This numbs the conscience of citizens”
[Piet Callens, Hefboom]
To numb the conscience of citizens is a bad thing, and can lead to complacency when tackling the ever-increasing climate, environmental and social crises we face.
What is the current EU response?
In order to clarify what sustainability means at business and investor level, the EU have introduced an EU Taxonomy in the form of a Taxonomy Regulation, which was published in the Official Journal of the European Union on 22 June 2020 and entered into force on 12 July 2020! This “Taxonomy” can help fight green washing at the investors level, because as of today, every bank can promote “sustainable” or “green” investments without any specific criteria behind it, in order to attract citizens looking for sustainability in their investments.
The Taxonomy will oblige these investors to respect certain criteria in the portfolio/project selection, so that they include only truly sustainable projects.
A new era for the global investment sphere
Around the world, investors and businesses are working with ESG criteria. Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI). To assess a company based on environmental, social, and governance (ESG) criteria, investors look at a broad range of behaviours, rather than just the “green” aspects of sustainability.
Useful links to read further:
- About the PRI: https://www.unpri.org/pri/about-the-pri
- Who Cares Wins 2005 Conference Report: https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/sustainability-at-ifc/publications/publications_report_whocareswins2005__wci__1319576590784
- ESGs & SDGs Meet Their Port Alegre Moment: https://www.asbcouncil.org/sites/main/files/file-attachments/esgs_and_sdgs_meet_their_port_alegre_moment_-__michael_and_ibon_-_march_2021.pdf
Social Economy Solutions to Green and Social Washing
To find out more, check out our Podcast miniseries called Finance4Good, which details about how ethical banks and financiers demonstrate careful and sustained monitoring of the activities they invest in to ensure they are truly sustainable and avoid green washing practices. Moreover, they show how impact can be measured and how they use participatory governance to ensure transparency and fairness in decision making! This is what is required to avoid green and social washing!
Here are some amazing examples of organisations, which are featured in the Podcast. Please check out these incredible organisations!
A Green and Social Taxonomy?
So, let’s dive a bit further into the concepts of an EU Taxonomy, specifically the Green Taxonomy and the proposed Social Taxonomy, along with more details on ESG criteria which help investors really demonstrate that they are truly investing in sustainable projects. However, take great care…these have to be extremely well defined to avoid investors taking advantage of the popular labelling of, green and sustainable! Unlike Ethical Banks and Financiers, traditional investors dedicate little to no time and energy in ensuring their investments are genuinely sustainable. They will also go out of their way to hide the unsustainable projects that they invest in.
The popularity and social pressure on businesses is growing to show the public that they are environmentally and socially responsible, therefore the EU is using an EU taxonomy and the idea of ESG criteria to try to clarify the definition of what is green and sustainable. So what is the EU Taxonomy?
According to the EU Commission: The EU Taxonomy is a classification system, establishing a list of environmentally sustainable economic activities which can help the EU scale up sustainable investment and implement the European Green Deal. The EU Taxonomy would provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable. This should reduce risk for investors, protect private investors from green washing, and help companies to become more climate-friendly.
So why do we need this?
We need this to meet the EU’s climate and energy targets for 2030 and reach the objectives of the European Green Deal, through direct investments towards sustainable projects and activities. Especially after COVID 19, which has shown the importance of redirecting investment towards sustainable, resilient solutions.
To achieve this, a common language and a clear definition of what is ‘sustainable’ is needed. So, an action plan on financing sustainable growth called for the creation of a common classification system for sustainable economic activities, or an “EU Taxonomy”.
A Social Taxonomy?
Let´s face it, there is no point in companies being “green” if investors ignore the basic rights and good conditions for workers and those in the supply chain of their investments. So, in July 2021 the Platform on Sustainable Finance (a kind of expert advisory group to the commission) drafted a report on a social taxonomy! The Social Taxonomy allows the EU to set out a clear global standard for what “good” looks like on social issues: encouraging new investment in socially beneficial enterprises; and reinforcing norms that investors and companies can use. This is hoped to increase social standards overall. Many NGOs strongly support the EU in developing a Social Taxonomy based on global social and human rights norms and the impact of both products and practices on affected stakeholder groups.
"Citizens are at the heart of our efforts. We can’t forget the social: the “S” of ESG (environmental, social and governance). It is hard to solve climate change without addressing social concerns. You are asked to assess whether and how a social taxonomy could address some of the challenges related to the achievement of social objectives"
[Mairead McGuinness, Commissioner of Financial services, financial stability and Capital Markets Union at the Launch of the Platform on Sustainable Finance in 2020]
The Commissioner continued that over the next two years, the Platform will support the Commission in shaping sustainable finance in the EU.
Is the Taxonomy enough to stop green and social washing?
From the perspective of SEE members FEBEA, the main criticism of the Taxonomy, is that it will apply only to specific products and not to the organisation as a whole. Taking again the “BNP Paribas” example, they will be able (if they respect the criteria) to propose sustainable investment products in line with the EU Taxonomy (for example a Green Fund), but on the other hand they will be able to continue selling other investment products linked to the fossil fuels or the weapon industry. This is precisely why ethical finance actors, like those mentioned above, push for a comprehensive system, that takes in consideration the entirety of the bank´s operations (including internal governance). Ethical finance actors indeed embrace this comprehensive sustainable approach.
So, as with any environmental issue, there needs to be a systemic change as is the case in the traditional banking sector. It is clear that the alternative option of ethical banks and financiers are already avoiding the issue of green and social washing, because their whole investment portfolio is transparent and made open to everybody. This should be the case for all banks and investors! We have read in this Blog how the landscape is changing and the EU is trying to provide clear definitions on what is sustainable though a Green Taxonomy, and we are working toward the same for the same for social, through a Social Taxonomy. Importantly, these definitions must not be watered down and must not leave loopholes for banks & investors to tell their clients they are behaving sustainably, while investing in things which directly harm our environment and our society!
A final plug
This Blog is based upon the fourth and final episode in the Podcast miniseries Finance4Good, and if you have not heard it, I encourage you to listen to check out all four episodes!
The first as an introduction to ethical finance, the second is on how ethical banks and financiers ensure the sustainability of their projects through close monitoring and the third is on measuring impact, participatory governance and transparency of ethical finance institutions.
Many thanks to Aurora Prospero, Network Manager at FEBEA for helping with this blog and the Podcast miniseries.