Understanding Greenwashing in Asia’s Finance Industry

Greenwashing is becoming a big concern in the financial sector, especially in Asia, where the need for sustainable investment is skyrocketing. But what exactly is greenwashing, and why is it such a critical issue?

A graph demonstrating the size of the global green economy (Source: FTSE Russell) growing alongside the number of climatewashing cases between 2016-2021 (Source: Climate Social Science Network). These do not reflect figures for 2022 and 2023 which, from a review of the overall literature, suggests a continuation of this upward trend.

What is Greenwashing?

Greenwashing refers to the false, deceptive, or misleading claims about the environmental benefits of a product, service, or company. In the finance industry, this means overstating the positive environmental impact of financial products or investment strategies, misleading investors and consumers.

In the investment chain, there are two stages of greenwashing – those that are generated from the claims and information by the investee companies themselves, and those that arise from the financial institutions.

Why is Greenwashing a Problem?

Greenwashing can have severe consequences, including:

• Misallocated Capital: It can divert funds away from genuinely sustainable projects, undermining efforts to combat climate change.
• Market Confusion: It makes it challenging to compare companies' environmental credentials accurately.
• Unfair Competition: It creates an uneven playing field, disadvantaging companies that genuinely invest in sustainable practices.
• Reduced Trust: It can erode investor and consumer confidence in green products and sustainable finance.

The Rise of Greenwashing

Greenwashing is on the rise due to the booming market for green finance, which is projected to be worth $5 trillion in Asia by 2030. As more financial products are labelled as green, the risk of misleading claims increases, necessitating robust regulatory frameworks to ensure transparency and accountability.

Regulatory Response

International and regional bodies are taking action to curb greenwashing. Key developments include:

• International Standards: Initiatives like the Taskforce on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB) are setting global benchmarks.
• Regional Guidelines: Countries across Asia, including China, Singapore, and Japan, are implementing their guidelines and standards to ensure accurate green claims and enhance investor confidence.

Combating Greenwashing

Financial institutions can mitigate greenwashing risks by following these key principles:

1. Screen Your Green: Ensure all green claims are accurate, specific, and substantiated.
2. In Good and Green Faith: Be transparent about how green objectives are integrated into financial products.
3. Walk Your Green Talk: Align the company's green image with its internal actions and third-party interactions.
4. Observe Changing Regulations: Stay updated on evolving regulations and industry expectations.
5. Be Alert to Green Duties: Understand and comply with legal and fiduciary duties to investors and stakeholders.