“Little evidence” of widespread greenwashing in global financial markets, according to S&P


Investors’ concerns about widespread greenwashing, or misleading environmental claims made by portfolio companies and fund managers, may be overstated, according to a recent report from ratings agency S&P.

The market for ‘sustainable’ investments has grown rapidly in recent years, with higher numbers of investors looking to allocate money according to ESG principles, and more fund managers launching investment products that claim to have sustainable characteristics.

According to S&P, global issuance of sustainable bonds, including green, social, sustainability, and sustainability-linked bonds, could collectively exceed USD1trillion in 2021, a near-fivefold increase over 2018 levels. 

Companies are also making more noise about sustainability, with 129 firms on the S&P500 citing ‘ESG’ in their fourth quarter 2020 earnings calls. This is up from only 14 firms that touched on ESG in their Q4 earnings call two years ago.

As ESG concerns become more mainstream for investors and companies and the number of sustainable-labelled products explodes, the challenge of identifying greenwashing grows more pressing.

“The sheer volume of ESG marketing and labelling, in combination with non-uniform sustainability commitments and reporting, has made it increasingly difficult for stakeholders to identify which claims are trustworthy and reliable and which are unreliable – or, in industry terms, "greenwashed,” says S&P in a recent research paper.

According to a survey by Quilter Investors in May 2021, greenwashing is the biggest concern for about 44 per cent of investors when selecting ESG investments. 

S&P believes that fears of greenwashing may be exaggerated. “While there are increasing concerns that these potentially misleading practices are taking place, there seems to be little evidence that they have become widespread in reality,” says the ratings agency.

S&P blames a lack of reliable and comparable ESG metrics and reporting for creating continued confusion in the ESG space. 

The market for ‘sustainable’ bonds is “highly unstandardised and fragmented” across issuer types and regions, with no common standard or enforcement mechanism for ESG disclosures at the instrument level. This includes how the proceeds of ‘sustainable’ bonds were used, and the impact of the projects financed.

S&P cites a report from the Climate Bonds Initiative (CBI), which looked at all green bonds in its Climate Bonds Database issued between November 2017 and March 2019, and found that only 77 per cent of green bond issuers published reports on how the bond’s proceeds were allocated. In addition, only 59 per cent quantified the environmental impact of the projects financed. 

“While CBI acknowledges there's more work to be done in the standardisation of the green bond market, it has ultimately concluded that greenwashing overall remains rare as issuers genuinely finance green projects and assets,” notes S&P.

Nevertheless, the market for sustainable bonds has expanded in recent years from green bonds to ‘social bonds’ and ‘transition bonds’, which respectively aim to finance projects with social impact and help energy-intensive firms transition to lower carbon emissions. This has led to new risks including ‘social washing’ and ‘transition washing’.

“The largest challenge for the social bond market is measuring impact,” says S&P, noting that social impact tends to be more qualitative in nature, which makes it harder to track and disclose metrics for social projects.  

Social impact projects often cite their impact using measures of input, such as dollars spent, loans issued, number of participants, or hospital beds added, as opposed to measures of improvement in social outcomes. 

“This had led to a level of vagueness and a lack of transparency in issuer disclosures, increasing investor scepticism that issuers are using proceeds for projects without additional social benefits,” says S&P. 

Meanwhile, some companies in energy-intensive sectors have issued ‘transition bonds’ to help them advance their contribution to a net-zero emissions economy. 

These transition bond instruments often lack “clarity and common terminology on what is considered to be a transition activity or project”, leading to concerns about ‘transition-washing’. 

Transition bond issues have been previously criticised for lacking ambition and making sustainability commitments that represent little more than a continuation of "business as usual" practices. For example, Hong-Kong based power company CLP Group was criticised for including the construction of natural gas-fired power plants in its revised transition bond framework. 

“Such concerns, we believe, have undermined the growth of the transition finance market with only 16 transition bond deals recorded as of June 2021 according to Dealogic,” says S&P.

The ratings agency says that harmonising different standards is key to mitigating concerns about greenwashing. 

S&P notes the principles launched by the International Capital Market Association (ICMA), to promote standardisation and transparency for use-of-proceeds and sustainability-linked bonds and loans. While the principles are voluntary, an estimated 97 per cent of use of proceeds and 80 per cent of sustainability-linked bonds issued globally adhered to them in 2020, according to ICMA and Environmental Finance.

Disclosure standards such as the Taskforce for Climate-related Financial Disclosures (TCFD) have also helped reduce investor fears around greenwashing, as well as improving transparency and reducing costs incurred by investors as they search for sustainable investments.

“While demand for sustainable financing instruments remains very strong and promises to increase, concerns around the accuracy of issuer sustainability claims can have profound impacts on the integrity and development of the sustainable finance market,” says S&P. 

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Madeleine Taylor
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