Global Bank Review: Going green – Rising expectations and risks on green claims

Banks face mounting pressure to make ambitious climate pledges, while avoiding greenwashing claims when rhetoric falls short of reality.

This article is part of our 2021 Global Bank Review – ESG: Creating a purposeful future, an annual publication by our Global Banks Sector Group which brings together our people who live and breathe banks.

For the banking community, ambitious environmental pledges are proving to be the proverbial rock and a hard place. While lenders face mounting pressure to issue sweeping green policies at a global level, investors, regulators and activists are paying close attention to banks’ sustainability statements. Failure to implement climate commitments leaves institutions exposed, reputationally and legally for so-called greenwashing, the making of misleading, inaccurate or exaggerated statements on climate policies, products or services.

How banks manage such forces is a fast-evolving playbook and one further complicated by markedly varying standards and regulatory responses to greenwashing across jurisdictions. A further cultural challenge for the banking community is merely keeping up with an environment that has transformed since the Paris Agreement on climate action was adopted in 2015; the last five years have progressively changed investor and regulatory attitudes on green pledges to mainstream priority issues.

Shareholder activism is increasingly strident. For example, one of Australia’s largest banks is facing a shareholder resolution at its AGM calling for further emission targets after publishing a poorly-received climate plan. On a wider scale, institutional investors are pushing companies to make net zero commitments, notably Climate Action 100+, the influential investor group whose 617 members manage US$55 trillion in assets. Though a relatively low-carbon industry, the long reach of banks through investment and lending decisions makes it inevitable that finance will be one of the key targets of activists and regulators.

Tackling greenwashing – A regional perspective

For banks operating globally, a key risk consideration is the differing regulatory stances across jurisdictions. Although approaches are broadly similar, enforcement and legislation are progressing at different paces in addressing misleading environmental claims.

Green you can mean

If the direction of travel is beyond debate, the salient point remains how to mount a credible response. Financial institutions may navigate this increased scrutiny across different jurisdictions by taking the following practical steps:

• ensuring that disclosures regarding ESG are accurate, made on reasonable grounds and suitably qualified;
• reviewing emission targets against the company’s operational policies and practices to ensure consistency; and
• if the company must depart from a prior statement or commitment, considering whether further disclosure is necessary.

Financial institutions should also be prepared to analyse material previously produced in relation to climate change, for consistency with proposed further disclosures or, if required, provision to regulators. This process may be assisted by the use of forensic data collection, data management or document review services.

As pressure for institutions to make emphatic statements on ESG rises, it will be pragmatic to solidify positions on climate disclosures in all relevant jurisdictions to be poised to mitigate mounting regulatory and litigation risks. The next five years will bring far greater risks attaching to perceived overstatements in green rhetoric than anything the industry has yet witnessed. Are you ready?