Avoiding greenwashing in the banking sector: from green promises to measurable action

Across Europe, banks remain the main source of financing for business expansion [1], including corporate plans for transitioning to net zero carbon emissions. Whether through direct lending and lines of credit, underwriting securities issues or as depositaries for collective investment and corporate assets, banks have more work to do to demonstrate that their green ambitions are more than just words, and that they are part of the climate solution rather than the problem.

Private and institutional investors want the assets they acquire to have a positive impact [2] on the energy transition. They also want their banks (as intermediaries), finance providers and custodians, to make their own contribution. That means banks must incorporate ESG across all their activities, not only in their own lending portfolios.

The burden of data collection, risk management and regulatory compliance is already heavy, and it will get more so as banks strive to avoid accusations of greenwashing, with all the risks that entails for an institution’s reputation. That’s why KPMG has established a full Greenwashing Risk Management Framework, from assessing each bank’s strategy, existing business operations and sustainability risks to implementation of sustainable processes across all its activities and underpinned by appropriate governance and control mechanisms.

Greener banking can deliver real opportunities for business growth. The financial system is central to the EU’s strategy to cut greenhouse gas emissions and move toward a sustainable economy. Private financing is expected to make a major contribution to the €470 billion needed annually to achieve Europe’s 2030 climate and environmental targets [3].

Legislators and regulators have adopted laws and policies to nudge the financial industry toward a more sustainable model. Retail and institutional clients are driving structural change, too; Europe is the world’s largest market for green pension and investment funds. They are asking more questions about who banks lend to and why, and they are willing to shift their money elsewhere if banks do not meet their expectations.

Transparency is critical – reputation, sales and profit can suffer if banks promise a greener future but continue to fund the expansion of fossil fuel and other high-emission sectors, as activist groups argue is currently happening.

In the EU, UK and US, legislators, central banks and regulators have adopted rules - or are preparing to do so - that require financial institutions to comply with disclosure rules or explain why they are not doing so and ensure that financial products and services match the claims made. Already, asset managers may be liable for fines and other sanctions for the mislabeling of products, and banks are coming under similar scrutiny [4]. Rules regarding capital requirements, provisions and valuations may be adapted to the detriment of high-emission activities and direct financing towards sustainable products and services [5].

European legislators have already made considerable progress towards harnessing the regulatory framework to achieve decarbonization goals, particularly for investment rules. Supervisors are highly conscious that greenwashing is a potential risk to investors and consumers as well as economic and financial stability [6]. With this, they are requiring claims of sustainability impact to be backed up by hard data.

From a supervisory perspective, the ECB has named the tackling of banks’ greenwashing risk as one of the main activities of its ‘supervisory priorities and risk assessment for 2023-2025’. In 2021, the European Commission requested to the European Supervisory Authorities (ESAs) to carry out a ‘Call for Evidence on Greenwashing’. This action will identify common practices in the banking, investment, and insurance industries; the results will be published in 2023. Last November, the ESMA (European Securities and Markets Authority) published a consultation paper on the guidelines for the use of ESG or sustainability-related terms in funds. From a regulatory perspective, the EU - as part of the EU Green Deal - has approved the EU Taxonomy Regulation and SFDR (Sustainable Finance Disclosure Regulation), which seeks to create a clear classification of sustainable investments that could counteract greenwashing.

Governments are not the only stakeholders using the law to effect change. Shareholder resolutions seeking to commit companies to science-based climate goals are increasing. Activist shareholders and non-governmental organizations are using a range of legal strategies to push for faster and more effective strategies to curb financing of fossil fuels and encourage renewable financing [7]. Banks will want to avoid becoming embroiled in high-profile legal fights that are likely to sully their reputation whether they win or lose.

The relationships between banks, borrowers and other customers are at times intricate, involve cross-border transactions, and, in most cases,  highly regulated.

Implementing fundamental changes, however desirable, may appear too daunting, long, and costly to implement. However, KPMG Luxembourg’s ESG transformation team and their international colleagues have devised a multi-step process to guide, implement and audit a complete overhaul for banks large and small.

We can help identify your strengths, weaknesses, opportunities and threats. We will benchmark green ambitions against those of your peers and conduct a thorough review of current practice across your operations, from trading desk, IT and back office to any branch network, products or services.

Once you have a clear picture of where you are starting from, we can work together to enhance the sustainability of your business, setting priority tasks and ensuring every department, business line and their staff to embrace ESG factors throughout everything they do.

Sustainability and green terminology mean different things to different people and businesses. The drivers of ESG integration are maturing as innovative technologies are developed and environmental priorities are refined. The same applies to legislation, regulation, and supervision. Global regulators, accounting bodies, industry alliances and business groups are hard at work developing new standards and measurement frameworks, but there is still much to be done even in areas as basic as definitions, making compliance harder and drawing out the process of harmonization.

The EU taxonomy of environmentally sustainable economic activities should be useful in clarifying whether a bank’s customers are on a sustainable basis or pathway, although political and legal arguments continue over contentious areas such as the aviation industry, gas and nuclear energy, and sustainable fuels for combustion-powered automobiles.

Definitions are vital – vague terminology has already thrown the flagship legislation for the investment industry, the Sustainable Finance Disclosure Regulation, into confusion. In the final quarter of 2022 Europe’s fund industry reclassified funds holding more than €170bn in assets from the SFDR’s most demanding sustainability category, article 9, to the less stringent article 8, for fear that maintaining the higher classification might be considered greenwashing [8].

New EU legislation mandating corporate disclosures by a much wider range of companies and benchmarking rules are on their way. Rating agencies are under pressure to improve their methodologies when assessing the sustainability of securities issuers and the purposes to which proceeds are put – a process that obviously affects banks in their role as facilitators of bond and share issues.

Our Luxembourg and worldwide teams draw on the resources required to track ESG regulation in every jurisdiction. Sustainability does not stop at national borders, and nor does its growing legal implications. We can keep you updated and ensure your business, activities, data and disclosures are compliant with these evolving standards and requirements, wherever your bank operates.

In a business with many moving parts, sustainability expertise is often concentrated and not always easy to access – hence the importance of communication. Deploying and implementing ESG policies effectively and ensuring that greenwashing risks are kept to a minimum requires all teams and staff to be on board.

Our communications plan involves bringing your staff with you on the sustainability journey, keeping them updated, trained and confident that their daily routines, actions and reports remain in line with your ambitions and goals.

Other stakeholders need to be on board, too. Borrowers need to understand why lending policies may be changing; shareholders will want reassurance that sustainability is not incompatible with investor returns; and regulators are constantly monitoring whether the changes relating to Financial institutions and investors are already struggling with competing standards, uncertain methodologies and difficulties in obtaining accurate or comprehensive data – from energy use in real estate portfolios [9], to carbon emissions, biodiversity protection and environmental degradation in tangled global supply chains of industries ranging from fishing and farming to renewable energy and fashion.

So we take ESG data extremely seriously. We set the highest targets for us and our clients, using the latest technology, tools and methodologies to ensure efficiency in monitoring and reporting and to ensure the transparency regulators are expecting. Our own experience has been vital in developing our services to assist banks with their ESG transformation and to help find the best solutions on how to define the forward looking ESG data need, how to efficiently retrieve it, how to analyze and act on it, and how to report on this data to ensure regulatory requirements are met.

We offer in-house ESG IQ data analytics and third-party tools to implement across your operations and IT systems, integrating them with existing or upgraded data collection and reporting processes. We help set key performance indicators and deliver real-time data on the assets you are responsible for.

That data also feeds into modeling, risk and business management frameworks, to help meet the expectations of increasingly prescriptive regulators. We ensure all physical and transition risks are incorporated into our Enterprise Wide Risk Management Framework.

Internal audit teams need to feel they have the necessary authority, access to data and board level engagement to check all processes and risks, minimize and correct errors, and ensure that greenwashing risks are correctly identified and addressed.

Our service also extends to your third-party data users. Regulators, shareholders and rating agencies need to know that your green claims are independently verified. We’ll ensure that data is your first line of defense in protecting your brand and your bottom line amid an ongoing battle to build a more sustainable financial system and economy.

If you’d like to find out how we can help you and your bank draw up and implement a solid, scalable Greenwashing Risk Management Framework plan aligned with your ESG strategy, please reach out to our team of experts.

This article was written in collaboration with Elena Fuzzi and Javier Casado Carnero.

[1] www.ebf.eu
[2] www.ft.com
[3] eur-lex.europa.eu
[4] www.spglobal.com
[5] www.bis.org
[6] www.eba.europa.eu
[7] esgclarity.com
[8] www.morningstar.co.uk
[9] www.asianinvestor.net