By Rodrigo Zepeda, CEO, Storm-7 Consulting

[Part IV of a four part blog series] 

Last year it was reported that the amount of CO2 production that is financed by British banks and asset managers is nearly double the entire annual carbon emissions attributable to the United Kingdom (UK) as a nation (Makortoff 2021; Shukaman 2021). The City provided investments and loans for firms and projects that emitted 805 million tonnes of CO2 in 2019, which represented 1.8 times the UK’s own annual net emissions for 2019 (Makortoff 2021; Shukman 2021). Makortoff (2021) observed that this:

“…highlights the financial industry as one of the UK’s largest contributors to the climate crisis, and means that if the City were its own country, it would outrank Germany as the ninth largest emitter of CO2 in the world.”

John Sauven, the executive director of Greenpeace in the UK noted that finance was the UK’s “dirty little secret”, as not only were British banks and investors responsible for more emissions than most nations, but the UK Government was giving them a “free pass” (Makortoff 2021; Greenpeace 2021). In Part III of the UK Greenwashing Briefing Series, it was identified that the UK Government and the Financial Conduct Authority (FCA) were, to a certain extent, complicit, in the wave after wave of banking and financial services mis-selling scandals that have continued to rock the British public.

They were complicit to the extent that, despite huge initial mis-selling scandals such as the mis-selling of endowment mortgages (1980s to 1990s), and the mis-selling of payment protection insurance (PPI) (1990s to 2000s), the UK Government and the FCA failed to implement regulatory measures designed to actively prevent other forms of subsequent mis-selling (e.g., interest rate swaps, packaged bank accounts, mortgages, guarantor loans) in an effective and timely manner.

It was also seen that the UK ‘Climate Financial Risk Forum’ (CFRF) was set up specifically by the FCA to discuss and manage climate-related risks (CFRF 2022). Out of 20 CFRF members currently chosen by the FCA, a total of 90% (18/20) are financial services firms (asset managers (n=7); banks (n=5); insurers (n=5); other (n=3) (CFRF 2022). On the face of it, the belief posited by the FCA that this amounts to “diverse representation” is risible (CFRF 2022).

First, it is the banks and asset management firms that are responsible for finance being one of the UK’s biggest contributors to climate change, that have been put in charge of climate-related risks and greenwashing issues via the CFRF, i.e., they are essentially regulating themselves.

Second, despite the huge regulatory failures on the part of the UK Government and the FCA, (as witnessed in multiple and successive financial mis-selling scandals combined with unprecedented fallout from the great financial crisis of 2007 to 2008), the FCA seem to have failed to implement substantive and procedural safeguards to monitor and supervise for potential finance industry bias and conflicts of interest within CFRF green policy discussion and policy-making processes. 

Third, the FCA seem to have intentionally precluded relevant third-party interests (e.g., climate change, environmental, and green support groups and non-governmental organisation (NGO) activists such as Greenpeace, Friends of the Earth, Fossil Free UK, Global Justice Now, and human rights groups) from being able to actively participate in CFRF discussions and voice their views, beliefs, and opinions.

Consequently, in effect, the very people most affected by future greenwashing initiatives and practices, namely the British public, are the ones that to all extents and purposes have been excluded from participating in UK greenwashing forums in the first place.

In Part I of the UK Greenwashing Briefing Series, it was shown that not only had greenwashing become widespread, but that greenwashing in financial investments and ‘ESG’ (Environmental, Social, Governance) investing was inherently complex, owing to the complex nature of financial instruments and investments. The snapshot of regulatory approaches adopted in the European Union (EU) and the United States (US), highlighted that greenwashing was an issue that was now being taken very seriously by them at the highest levels.

Indeed, greenwashing enforcement cases had already been commenced in the US via the efforts of the US Securities and Exchange Commission (SEC) ‘Climate and ESG Task Force’ (SEC ESG Taskforce), and in Germany, an EU Member State. Tackling greenwashing was assigned top priority status and was supported by EU greenwashing initiatives such as the Sustainable Finance Disclosures Regulation ((EU) 2019/2088) (SFDR), and a proposal for a Regulation on European green bonds (COM/2021/391).

In Part II of the Greenwashing Briefing Series, it was shown that the skyrocketing incidence of greenwashing practices had been widely identified in the literature more than a decade ago (Delmas and Burbano 2011). Furthermore, it was shown that greenwashing is a highly complex and nuanced issue that is influenced by a multitude of external, organisational, and psychological drivers in practice (Delmas and Burbano 2011).

So, clearly, greenwashing went far beyond simply false or misleading advertising, but was often influenced by structural, cultural, and behavioural factors. This underlying complexity in practices was highlighted via a range of illustrative greenwashing in financial investments behaviours and examples. Such behaviours and examples seem to be borne out in practice. In the UK, a recent study conducted in 2021 showed that over half of financial services professionals claimed that greenwashing was rife in the industry (Turner 2021).

Also, a total of 45% of polled financial services professionals believed that being truly sustainable would be too costly for firms, and 36% believed that most financial institutions lacked the resources to become sustainable (Turner 2021). Consequently, there is an inherent bias within the industry that can be identified, one which leans towards minimising future green and sustainable compliance costs and actions for firms, and minimising future greenwashing regulatory policies and legislation to minimise the financial impact and costs on banks and financial services firms.

In fact, 30% of survey respondents believed that financial services firms were deliberately waiting for future regulation which would force their hand vis-à-vis environmental obligations, as opposed to implementing voluntary environmental compliance early (Turner 2021). In addition, if greenwashing is driven by organisational drivers such as firm characteristics, misaligned incentive structures and cultures, and organisational inertia, it is difficult to see how the formulation of minimal green standards via a UK green taxonomy can effectively address such ‘hidden’ organisational, behavioural, and cultural issues.

As such, the development of a UK green taxonomy will very likely be insufficient per se to effectively address greenwashing, as this will fail to address inter alia the potential bias, conflicts of interest, conduct risk, and entrenched and vested interests emanating from the finance industry itself. Together, these issues tend to demonstrate that greenwashing is a complex issue that may be driven by a multitude of moderating factors which makes comprehensively understanding greenwashing in practice a highly important issue in the UK.

Not only is greenwashing created and driven by a multitude of diverse and complex factors, but the creation of a uniform framework for assessing levels of ESG-compliance will be extremely challenging in practice (Ross and Pulimood 2022). This is because of the diverse and very broad range of legal and policy guidance and standards that already exist (Ross and Pulimood 2022). In the US, these issues and problems have in part been addressed via the formation of the SEC ESG Taskforce, the issuing of industry ESG guidance, and proposed new legislation in the form of the ‘ESG Disclosure Simplification Act’ (Taylor 2021).

By contrast in the UK, the ‘Green Technical Advisory Group’ (GTAG) is an independent expert group that has been set up with a very narrow focus, namely, to aid in the delivery of a new ‘Green Taxonomy’ (de Quincey and Pandit 2021). It has no enforcement remit or powers of any kind, and the advice and recommendations provided by the GTAG are completely non-binding in nature. The UK Government and the FCA need to be seen to be taking decisive action in public, otherwise they risk being ridiculed by comparison to the advanced stages of regulatory decision-making and standards-making evinced by the EU and US regulatory authorities.

Yet, they are clearly not driving the greenwashing conversation, they are instead playing catch-up. This is highlighted by the complete lack of any detailed (i.e., 50-100 pages) whitepapers, discussion papers, or research papers covering greenwashing issues in depth published by the UK Government or regulatory authorities throughout an entire decade (2010-2020) (Part III of the Greenwashing Briefing Series). It is true that the FCA is proposing to introduce a new ESG Sourcebook and enhanced climate-related disclosures by standard listed companies in the UK (in an attempt to replicate the EU SFDR requirements) sometime in the future (de Quincey and Pandit 2021).

Nevertheless, the timeline analysed throughout the Greenwashing Briefing Series shows that these are measures that should have been researched and contemplated many years ago. Moreover, the complexity of greenwashing demonstrated shows that the issue of greenwashing is one which should have been much more widely addressed and debated in public, and at the very least, should have involved a great many more financial technology (FinTech) firms from the outset, i.e., in order to develop potential FinTech solutions in parallel to regulatory developments. FinTech and regulatory technology (RegTech) firms generally started to evolve and proliferate in the UK from 2015 onwards led by a host of new and cutting-edge regulatory compliance frameworks that emanated from the EU.

The five year period from 2015 to 2020 would therefore have been an extremely ideal time during which the UK Government and regulatory authorities could have directly engaged with green, climate change, sustainability, and greenwashing related issues. More importantly, they could have involved and/or sponsored FinTech and RegTech firms in the UK to actively participate and engage in public discussions and debate, in order to potentially develop technology solutions to a range of potential greenwashing related issues, such as green taxonomies, green and sustainable reporting, and analysis of green investments and investments criteria. Unfortunately, this did not happen.

At present, the UK Government and regulatory authorities have still not engaged such types of firms, not even within the FCA CFRF process. There seems to be a distinct feeling, especially in the FCA CFRF process, that not only are the views of the public and climate and green NGOs being ignored, but that banks and financial services firms are still being given a ‘free pass’, so to speak. In conclusion, there would seem to exist a reasonable amount of evidence to show that at present, overall, the UK still arguably seems to be lagging behind in terms of addressing greenwashing issues through modern and sophisticated environmental regulatory finance developments.