Greenwashing has been defined as “a practice where 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,” according to the European Supervisory Authorities (ESAs).
On June 1, the ESAs published their progress reports on greenwashing in the financial sector. In the reports, they put forward this common-ground, high-level understanding of greenwashing that is applicable to market participants across their respective remits: banking, insurance and pensions, and financial markets.
Meanwhile, asset owners and managers are showing increasing commitment to deliver credible reporting on environmental, social, and corporate governance (ESG) matters, and the battle against misleading data is seeing progress, with investee companies being helped to realise their ESG efforts and increasing their stock value.
The reports from European regulators echo steps among Asian regulators to create less ambiguity around greenwashing. Such directives help clarify the requirements in the financial markets, said Jack Lin, president at Hong Kong-based data provider MioTech.
“The regulators in the Asia region are making the standards more specific, because you need to know what you need to comply with. Once you know what the rules are for those companies that intend to comply, then you know what you need to do,” Lin told delegates at AsianInvestor’s Asia Investment Summit in Hong Kong in May.
The Monetary Authority Singapore (MAS) in April further updated its benchmark environmental reporting standards to safeguard against greenwashing, while the Hong Kong Monetary Authority (HKMA) in November 2022 addressed greenwashing in the corporate bond markets.
The increased focus and specific definitions for greenwashing will help many asset owners’ and managers’ investee companies to adhere to proper ESG reporting and efforts.
That applies especially to small and middle-sized companies (SMEs) that might be doing a lot of ESG-related work without even knowing nor capitalising on it, according to Dr. Louis Cheng, professor of banking and finance and director of the research centre for ESG and the research institute for business at the Hang Seng University of Hong Kong.
Simultaneously taking up a seat on the investment committee at Hong Kong’s Hospital Authority Provident Fund Scheme (HAPFS) until recently, Cheng sees a need to help listed SMEs that have engaged in ESG efforts without realising it or knowing how to market or incorporate these efforts.
“That has been mentioned by several top buy side managers; they find that a company has actually practised ESG but they don’t know how to promote it and let the world know,” Cheng told delegates at AsianInvestor’s Asia Investment Summit.
“If you help them, the ESG premium, if you believe in that, will be realised, and with the same fundamentals the stock price will go up. That ESG recognition would be a quick fix to help many companies and a win-win also for investors.”
Lin agreed and pointed out that the best defence against greenwashing concerns is data to prove efforts. Therefore, even SMEs can benefit from software that makes it easier to organise the ESG and carbon-related data they must disclose.
The result will be better investor interest, as the market forces are an even more powerful driving force beyond the regulatory drive, Lin argued.
“You explain to Asian companies that this is about money; if you do ESG well, you will get lower borrowing costs from your providers. You will get higher stock prices because more fund managers will be attracted to your stock,” he said.
“More importantly, customers will notice because if your buyers are in the US or Europe, they will make demands on supply companies meeting certain standards. They need supply chain companies’ disclosure, to make their own ESG reports.”
The focus on greenwashing looks likely to intensify; in Europe, the ESAs plan to publish final greenwashing reports in May 2024. By then, the regulators will consider final recommendations, including on possible changes to the EU regulatory framework.