Who’s afraid of greenwashing?

“The fear of greenwashing may be greater than the reality across the global financial markets” is the title of a report S&P Global Ratings published last month, which also sums up the agency’s conclusion.

But after reading the roughly 12 pages of information presented, we had difficulty sharing the ratings agency’s viewpoint.

“The sheer volume of ESG marketing and labelling, in combination with non-uniform sustainability commitments and reporting, has made it increasingly difficult for stakeholders to identify which claims are trustworthy and reliable and which are unreliable – or in industry terms ‘greenwashed’,” the report states.

The authors also cite “lack of transparency, reporting and data disclosure” contributing to investors and stakeholders questioning the validity of these labels. Despite this, S&P says “there seems to be little evidence that [these potentially misleading practices] have become widespread in reality”.

“We’re not trying to say that investors shouldn’t be vigilant: they definitively should remain vigilant, especially as the market grows and diversifies and new types of instruments enter the space,” the report’s lead analyst, sustainable finance associate Lori Shapiro, told us in an interview. “But efforts such as the voluntary principles set out by the International Capital Markets Association and the Loan Markets Association have facilitated standardisation of the market. So, essentially, we don’t believe greenwashing risks will hurt the development of this fast-growing market if the current pace of harmonisation and standardisation continues.”

There’s no doubt market growth has been impressive. According to the agency, sustainable bond issuance – which includes green, social, sustainability and sustainability-linked bonds – is expected to exceed $1 trillion in 2021, a nearly five-fold increase compared with 2018 levels.

However, market growth and being able to rely on that market to accurately perform its function are two different things.

A recent analysis by Bloomberg of 77 revolving credit facilities and term loans that included sustainability adjustments found that more than 25 percent of these imposed no penalties if the borrower’s ESG targets were not met and only a 1 basis point incentive if they were.

Beyond bonds and loans, the situation does not appear much better when looking at other financial products. At the time of writing, affiliate title Responsible Investor reported that the Dutch securities regulator Autoriteit Financiële Markten found that 46 of around 100 Dutch investment funds “with an overarching sustainability objective under the EU’s sustainable finance disclosure rules did not have an exclusive focus on sustainability or publish granular disclosures on their sustainability characteristics”.

The Climate Disclosure Standards Board, in its latest report on the status of environmental disclosure in Europe, found that while some progress has been made compared with 2019, TCFD adoption remains “inconsistent and incomplete”.

“The existing regime of voluntary TCFD adoption means that companies continue to take a selective approach to disclosure,” CDSB wrote.

So while the sustainable market may continue to thrive, it would seem there is enough evidence of greenwashing – whether intentional or accidental or whether in some segments of the financial markets or across the board – to make investors feel uneasy.

In that sense, our concern is not so much whether “greenwashing risks will hurt the development of this fast-growing market”, as Shapiro put it. Our main concern is that infrastructure investors – who play a key role in mitigating the effects of climate change – might get lulled into overestimating the efficacy of their investments. That would prove Tariq Fancy, BlackRock’s former sustainable investing chief, right when he claims that ESG is a “dangerous placebo”.

Given the urgency of limiting temperature increases to 1.5 degree Celsius, it is imperative investors can fully trust sustainability labels will translate into real action.