Greenwashing in the financial sector: separating fact from fiction

Greenwashing has increased significantly in recent years, especially in the financial sector. The number of greenwashing incidents in this sector has tripled in the past five years. It is logical, therefore, that this has caught the attention of regulators, national competition and market authorities. For a bank, insurer, or asset manager, it is of the utmost importance that sustainability claims are credible. PwC expert Sophie de Vries provides five tips to increase credibility.

When it comes to greenwashing, the challenge for financial service providers is twofold. On one hand, communicating about sustainability performance can lead to an accusation of greenwashing. At the same time, not reporting on sustainability can result in financial service providers violating regulations such as the Corporate Sustainability Reporting Directive (CSRD). Additionally, financial institutions may lose revenue as customers prefer companies that do operate sustainably. 

This duality is partly due to the lack of a consistent definition of greenwashing. The three European supervisory authorities (ESAs) who recently published their final reports on greenwashing understand it as: "a practice whereby 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. This practice may be misleading to consumers, investors, or other market participants”. 

In practice, greenwashing can, for example, occur when management only emphasizes the green features of a product and inadequately reports its polluting characteristics or when companies change their green targets before achieving them. 

Legislation provides insufficient guarantees for good sustainability reporting

CSRD, like other sustainability legislation, should contribute to a clearer framework for sustainability reporting. However, these laws and guidelines do not provide guarantees. Publishing sustainability claims without robust evidence can cause significant reputational damage and expose companies to legal risks. This applies not only to the financial institutions themselves but also to their customers. 

Complaints about greenwashing currently have a legal basis in national consumer laws and codes, such as Empowering Consumers for the Green Transition (EU) and the Green Claims Code (in the United Kingdom).

In the coming years, it is expected that new sustainability legislation such as the Green Claims Directive (EU) and the Sustainable Finance Disclosure Regulation (SFDR) will lead to more greenwashing claims. Therefore, companies must implement controls that ensure sustainability statements are accurate, transparent, and complete.

Communicating credibly about sustainability

Credibility is crucial when communicating about sustainability. However, this comes with several challenges. The main challenges are the availability and quality of data and balancing different interests and stakeholders. The standards developed for the content and format of sustainability reporting, the European Sustainability Reporting Standards (ESRS), are also new. 

Challenge #1: Reliable data

Both the availability and quality of sustainability data are currently limited. For example, financial institutions need reliable customer data to substantiate sustainability claims regarding scope 3 emissions and expose greenwashing risks. Initiatives supporting the transition to climate neutrality may also not always be well integrated into business operations. To bridge the data gap, the CSRD encourages the use of benchmarks, but this approach does not provide guarantees. 

Challenge #2: Different interests

A second challenge is a difference in vision regarding the concept of sustainability among different stakeholders. This makes it difficult for financial institutions to meet all their requirements and expectations. Therefore, a common understanding of sustainability and greenwashing risks needs to be developed within organizations. Internationally, countries have different requirements for sustainability claims, and public opinion or customer expectations can also vary. Companies must weigh all these interests while remaining true to their own goals. 

Challenge #3: Lack of a clear definition

As mentioned, the lack of a universal definition and clear guidelines on greenwashing is a challenge, despite the efforts of the three European supervisory authorities. Uncertainty is fuelled by rapid changes in legislation. Within organizations, it is often unclear who is responsible for greenwashing risks. Best practices in governance still need to be developed.

Five tips to increase the credibility of sustainability claims 

These challenges for credible communication are one thing. Another question is: how does a financial service provider align its strategy, sales, and marketing with sustainability and avoid unsubstantiated sustainability claims? To do this, it is wise to look at companies that credibly support their claims. These can serve as a guide. Five tips to increase the credibility of sustainability claims:

In conclusion, ambition is important in sustainability reporting, but above all, evidence of actual performance is crucial for credibility.