The double-edged sword of green finance: ESG commitments & greenwashing

The financial sector is charging towards sustainable investing, with ESG-mandated assets projected to represent half of all professionally managed assets globally by 2024.

However, a closer look reveals a more complex narrative. Greenwashing, the practice of overstating sustainability commitments, is an increasing concern, particularly in the banking and investment sectors.

The European Banking Authority (EBA) recently issued a warning about this emerging risk, stating that ESG pledges, strategies, and labels are highly susceptible to greenwashing. The impact of such deceptive practices could lead to significant reputational and litigation risks for firms. Although currently considered a low to medium risk for banks and a medium to high risk for investment firms, the EBA expects these levels to rise in the future.

Despite this, the report revealed growing climate accountability due to public concern about climate change, forcing firms to be more transparent about their environmental policies and impact.

The “significant gap” between words and deeds

Adding to the complexity of the situation, a ShareAction report has revealed concerning findings about the 2030 climate targets of asset managers. Analysing 77 of the world’s largest asset managers, managing over $77 trillion in assets, the study found that three-quarters of their investments are excluded from their 2030 climate targets, leaving their net-zero aspirations on uncertain ground. Shockingly, almost a third of these firms have set no interim emissions goals.

In firms that have set interim climate targets, only a quarter of their managed assets’ value is included in these goals. This discrepancy raises doubts about the credibility of their long-term net-zero ambitions. The most common exclusion is Scope 3 (indirect) emissions, a substantial contributor to the total climate footprint.

ShareAction report: Point of No Returns 2023 Part IV: Climate and Biodiversity

In addition to emissions targets, the ShareAction analysis revealed that the majority of asset managers show insufficient action against deforestation and biodiversity loss. Three-quarters of these firms have no deforestation commitments, and none have set public targets for preserving natural habitats.

Many asset managers argue for the need for better data to set stricter climate goals. However, ShareAction counters that many firms gather but fail to utilise this data effectively in their investment approach.

As we forge ahead in this era of green finance, firms need to genuinely align their actions with their ESG commitments and be held accountable for misleading practices. It’s essential to stay vigilant against greenwashing while promoting authentic sustainability efforts, and for asset managers that means setting strong, effective and comprehensive net-zero targets.

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