Go Sustainable – Dodge Greenwashing!
What is Sustainable Finance?
Over the years, the issue of environmental degradation and its undesirable consequences (such as pollution) have negatively impacted our planet. The concept of Sustainable Finance is about financing the transition to a resilient and climate neutral economy. This is done by channelling money towards activities which do not continue to cause this harm. In other words, the goal of sustainable finance is to promote economic development while also positively contributing towards environmental and social issues.
However, this target would not be possible without the involvement of financial institutions, such as banks, investment services providers and insurance companies, who play an important role in channelling investors’ money towards financial green products.
What Makes a Financial Product “Green” and How Does It Stand Out?
You may have heard of the ESG framework. This refers to Environmental, Social, Governance factors which ensure that projects taken on by companies contribute to a greener economy, uphold fair labour practices, and maintain ethical standards.
When it comes to green products, ESG is a fundamental part of the equation. This is because the financial institutions which are offering them would also be investing in companies which comply with the ESG framework. In this sense, green products promote lasting positive impacts on the economy and society, while securing financial returns.
Can you give me an example of a “Green” Product?
Beyond typical financial products, these can include:
- Bonds which fund eco-friendly projects.
- Ethical Funds which invest in sustainable industries.
- Insurance-based Investment Products, whose underlying investments also target sustainable goals in the context of the environmental, social and governance framework.
- Green Loans which finance projects entailing renewable energy, such as solar panels or electric cars, and water conservation.
If you want to know more about investments,
loans, insurance or pensions with a sustainable focus, have a look at our fact sheet here.
What is Greenwashing and How Does It Relate to Sustainable Finance?
As sustainable finance gains momentum, so does the risk of misleading practices. Greenwashing happens when a company portrays itself or its products or services as environmentally friendly, when they are not. Companies know that being seen as “green” can give them a competitive edge among environmentally conscious consumers. So they may intentionally, or accidentally call a product “green” when it’s barely a shade of mint….or worse!
This poses a significant challenge for consumers who genuinely want to invest in green options. So, it’s important to be aware of this when looking at sustainable investments.
Can you share examples of greenwashing?
To better grasp how greenwashing can manifest itself, let’s delve into two illustrative case studies:
Case 1: The Investment Advisor's Misguided Advice
Anne is an environmentally conscious investor who wants to earn money while helping the environment. Her advisor recommends an environmental fund, but when Anne looks at the details, she doesn’t see any proof that the fund actually invests in underlying environmentally friendly projects. The advisor’s sales pitch was too good to be true.
Case 2: The Bank's 'Plant a Tree' Campaign: A Promise Unfulfilled
A bank initiates a “Plant a Tree” campaign, promising to plant a tree in a developing country for every €X paid with a certain credit card, leading Sam to make purchases with the card under the impression of contributing to reforestation. But when Sam asks about the bank’s tree planting commitment, he gets unclear responses and no proof of the trees planted, leading him to doubt the campaign’s authenticity and sustainability impact.
What Should I Watch Out For?
To safeguard your financial well-being and ensure your investments align with your sustainability values, follow these essential steps:
- Question sustainability claims and demand transparency from financial institutions to scrutinise their sustainability claims. Engage in open dialogue with them to gain a deeper understanding of their commitment to sustainability.
- Do your research and understand the criteria and metrics used to measure environmental impact and make informed decisions accordingly.
- Ensure that the products align with your preferences.
- Support initiatives that have undergone rigorous scrutiny and adhere to strict sustainability standards.
