GREENWASHING IN THE EU SUSTAINABLE
FINANCE FRAMEWORK
by
Artom Gnedin
Law & Finance
Amsterdam Law School & Amsterdam Business School
University of Amsterdam
Prof. R. Smits (Dr. A. L. Jonkers)
July 2020
2
Table of contents
Abbreviations ... 4
1 Introduction ... 8
2 The EU Sustainable Finance Framework ... 11
2.1 The Action Plan ... 11
2.2 The Action Plan Implementation ... 12
2.3 The European Green Deal ... 17
2.4 The European Green Deal Implementation ... 18
3 The Phenomenon of Greenwashing... 20
3.1 Definition of Greenwashing ... 20
3.1.1 In Search of Definition ... 20
3.1.2 Novel Perspective to Studying Greenwashing Definitions ... 22
3.1.3 Greenwashing vs. „ESG-washing‟ ... 23
3.2 Drivers of Greenwashing ... 24
3.2.1 Drivers to Be a „Green‟ Company ... 24
3.2.2 Drivers of „Greenwashing‟ ... 26
3.3 Effects of Greenwashing ... 28
4 Greenwashing in EU Sustainable Finance Framework ... 30
4.1 The Roles of the Financial System ... 30
4.2 Regulation on Sustainability-Related Disclosures in the Financial Services Sector ... 32
4.2.1 The SFDR Definitions ... 33
4.2.2 The SFDR Disclosures ... 33
4.3 The Taxonomy Regulation... 36
4.4 The Benchmark Regulation ... 38
4.4.1 The EU Climate Transition Benchmark and the EU Paris-aligned Benchmark ... 39
3 4.4.2 Provision of Benchmarks... 40 5 Further Research ... 42 6 Conclusion ... 43 Bibliography ... 45 7 Appendix ... 54
4
Abbreviations
Accounting Directive Directive 2013/34/EU of the European
Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC [2013] OJ L 182
Action Plan Commission, „The Action Plan: Financing
Sustainable Growth‟ (Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions) COM/2018/097 final <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52018D C0097>
AIFMD Directive 2011/61/EU of the European
Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 Text with EEA relevance [2011] OJ L 174
Benchmark Regulation Regulation (EU) 2016/1011 of the European
Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 [2016] OJ L 171
Benchmark Regulation Amendment Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27
November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks [2019] OJ L 317
Commission European Commission
5
Directive on Waste Directive 2008/98/EC of the European
Parliament and of the Council of 19 November 2008 on waste and repealing certain Directives (Text with EEA relevance) [2008] OJ L 312
EBA European Banking Authority
EIOPA European Insurance and Occupational
Pensions Authority
ESAs European Supervisory Authorities
ESG Environmental, Social and Governance
ESMA European Securities and Markets Authority
EU European Union
European Green Deal Commission, „The European Green Deal‟
(Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions) COM(2019) 640 final
<https://eur-lex.europa.eu/resource.html?uri=cellar:b828
d165-1c22-11ea-8c1f-01aa75ed71a1.0002.02/DOC_1&format=PD F>
IDD Directive (EU) 2016/97 of the European
Parliament and of the Council of 20 January 2016 on insurance distribution [2016] OJ L 26
Marine Strategy Framework Directive Directive 2008/56/EC of the European Parliament and of the Council of 17 June 2008 establishing a framework for community action in the field of marine environmental policy [2008] OJ L 164
MiFID II Directive 2014/65/EU of the European
Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and
Directive 2011/61/EU [2014] OJ L 173
MiFIR Regulation (EU) No 600/2014 of the
European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 [2014] OJ L 173
6
NFRD Directive 2014/95/EU of the European
Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups [2014] OJ L 330
NGO Non-Governmental Organisation
PRIIPs Regulation Regulation (EU) No 1286/2014 of the
European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) [2014] OJ L 352
Proposal for European Climate Law Proposal for a Regulation of the European Parliament and of the Council establishing the framework for achieving climate neutrality and amending Regulation (EU) 2018/1999 (European Climate Law) [2020] COM/2020/80 final
SFDR Regulation (EU) 2019/2088 of the European
Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector [2019] OJ L 317
SME Small and Medium Enterprises
Solvency II Directive 2009/138/EC of the European
Parliament and of the Council of 25
November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) [2009] OJ L 335
Taxonomy Regulation Regulation (EU) 2020/852 of the European
Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and
amending Regulation (EU) 2019/2088 [2020] OJ L 198
TEG Technical Expert Group on Sustainable
Finance
TEU Treaty on European Union
UCITS Directive Directive 2014/91/EU of the European
Parliament and of the Council of 23 July 2014 amending Directive 2009/65/EC on the coordination of laws, regulations and
7
undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and sanctions [2014] OJ L 257
8
1 Introduction
Sustainability is currently one of the most vibrant topics in scientific discourse. The impartial observer from the outside of our solar system would even assume that humankind is currently learning a lesson and shifts from blindly seeking exponential growth of GDP
towards more sophisticated methods of increasing the average quality of life on Earth. One of the sectors that experience boosted interest in sustainability is the financial sector. Such a trend is perceptible in the current EU milieu as even during the challenging times of the first half of 2020, the topic of sustainable finance does not seem to be pushed to the side-lines.
In an attempt to contribute to the literature studying the phenomenon of
greenwashing, tracking the development of sustainable finance in the EU, and particularly to literature dedicated to the EU financial legislation, this paper seeks to answer three research questions:
1) What are the latest developments in the field of establishing the EU Sustainable Finance Framework?
2) Is greenwashing capable of disrupting the endeavours to establish the well-functioning EU Sustainable Finance Framework?
3) Are there any greenwashing risks in the SFDR, the Taxonomy Regulation and the Benchmark Regulation?
This paper presents the output of desktop research. The main part of the research presents the results of employing the analytical methodology. However, parts employing the synthetic methodology are included as well. I employ synthetic methodology where (i) I develop a new method of studying definitions of greenwashing (Section 3.1); and where (ii) I assess greenwashing risks in the regulatory environment established by the SFDR, the
Taxonomy Regulation, and the Benchmark Regulation (Section 4).
To answer the research questions the following issues are examined. In Section 2, I summarize the latest development of EU efforts to integrate sustainability into a wide range of EU policies – in other words, I examine the „EU green rules‟. Firstly, I present an
overview of the Action Plan1 (Section 2.1) and the steps to implement the goals of the Action
1
9
Plan taken to this day (Section 2.2). Secondly, I present an overview of the European Green Deal2 (Section 2.3) and the actions taken so far to implement the goals of the European Green Deal (Section 2.4). I follow up on the thorough examination of this development provided by Siri and Zhu in late 20193 and I extend the summary by mentioning the latest developments in the field of the EU Sustainable Finance Framework.
In Section 3, I present the phenomenon of greenwashing. First of all, in Section 3.1, I introduce the definition of the term greenwashing. The investigation of the term is mainly based on a systematic review of concepts and forms of greenwashing presented by de Freitas Netto et al.4 I have created my own categorization of greenwashing definitions, which take into account three separate components of greenwashing definition. I was inspired by Seele and Gatti, who enriched literature on greenwashing by including the element of the beholder of greenwashing activity into the definition of greenwashing. Their argument can be
summarised by saying that there is no greenwashing without an accusation of greenwashing.5 Unlike Seele and Gatti, I point out the perspective of the author of the definition. Section 3.2 examines different drivers of greenwashing. The examination of greenwashing drivers is based on the paper by Delmas and Burbano6, who contribute to the literature by addressing corporations‟ motivations to implement pro-environmental behavior. The authors establish a matrix for the assessment of such drivers. Section 3.3 presents the effects of greenwashing. Intuitively, most of the literature, such as that of Furlow7 or Delmas and Burbano,8 argues that the effects of greenwashing are negative. However, the opposite opinion of Wu, Zhang and Xie9 is also presented.
2
The European Green Deal. 3
Michele Siri and Shanshan Zhu, „Will the EU Commission Successfully Integrate Sustainability Risks and Factors in the Investor Protection Regime? A Research Agenda‟ (Sustainability, 2019)
<https://www.mdpi.com/2071-1050/11/22/6292>. 4
Sebastião Vieira de Freitas Netto et al., „Concepts and forms of greenwashing: a systematic review‟ (Environmental Science Europe 32, 19, 2020) <https://doi.org/10.1186/s12302-020-0300-3>. 5
Peter Seele and Lucia Gatti, „Greenwashing Revisited: In Search of a Typology and Accusation-Based Definition Incorporating Legitimacy Strategies‟ (Bus. Strat. Env. 26, 239–252, 2017)
<https://onlinelibrary.wiley.com/doi/full/10.1002/bse.1912>. 6
Magali A. Delmas and Vanessa Cuerel Burbano, „The Drivers of Greenwashing‟ (California Management Review, 2011) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1966721&download=yes>.
7
Nancy E Furlow, „Greenwashing in the New Millennium‟ (Journal of Applied Business and Economics, 2010) <http://na-businesspress.homestead.com/JABE/jabe106/FurlowWeb.pdf>.
8
Delmas and Burbano (n 6). 9
Yue Wu, Kaifu Zhang and Jinhong Xie, „Bad Greenwashing, Good Greenwashing: Corporate Social Responsibility and Information Transparency‟ (Management Science 66(7): 3095-3112, 2020) <https://pubsonline.informs.org/doi/pdf/10.1287/mnsc.2019.3340>.
10
In Section 4, I employ findings from Section 2 and Section 3. Firstly, in order to examine roles of financial system from the perspective of the EU Framework of Sustainable Finance (Section 4.1). Secondly, in order to examine the central regulations forming the EU Sustainable Finance Framework, namely the SFDR (Section 4.2), the Taxonomy Regulation (Section 4.3) and the Benchmark Regulation (Section 4.4), and in order to inspect risks of greenwashing following from certain provisions of these regulations.
In Section 5, I share a few thoughts on further research that could pick up the threads of this paper.
In Section 6, I conclude by answering both research questions.
Before I let you, my dear reader, to continue with reading, I would like to share with you the fact that the main inspiration for writing this paper was my impression that media space has recently been so overwhelmed by adjectives such as „environmental‟, „green‟ or „sustainable‟ that it is now more important than ever to remember that „all the glitters is not gold‟.
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2 The EU Sustainable Finance Framework
In order to introduce the EU Sustainable Finance Framework, I present the two major political initiatives expressed in form of Commission communication – the Action Plan and the European Green Deal. I present steps towards implementation of each initiative right after giving the overview of the concerned initiative.
2.1 The Action Plan
It has been more than two years since the Commission released the Action Plan presenting the idea of financing sustainable growth.10 The paradigm of sustainable growth under the Action Plan consists of three parts. Firstly, it is an acknowledgement of a more sustainable path for the planet and economy, which was chosen by the vast majority of countries around the world, including the EU and all EU member states, by adopting Paris Agreement on climate change11 and by supporting the UN 2030 Agenda for Sustainable Development.12 Secondly, it is a belief that sustainability and orientation of the EU economy towards low-carbon, resource-efficient, and circular model is crucial for securing long-term competitiveness of the EU economy. Thirdly, it is a belief that the financial system represents a key role in the adaptation of public policies to the reality of unpredictable consequences of climate change and resource depletion.13
The general understanding of the term sustainable finance, around which the Action Plan was built, is the inclusion of environmental and social considerations into the process of investment decision making.14
Under the Action Plan, the Commission has committed to pursuing three goals which aim to utilize financial system to fulfil the specific needs of European and global economy for the benefit of the planet and the society. The first goal is to support sustainable and inclusive growth by reorienting capital flows towards sustainable investments. The second goal is to reduce the financial impact of environmental and social risks by having the financial sector consider environmental and social goals. The last goal is to secure the
10
The Action Plan. 11
Paris Agreement (United Nations Framework Convention on Climate Change, Agreement to combat climate change and to accelerate and intensify the actions and investments needed for a sustainable low carbon future, 2015).
12
United Nations, „The Sustainable Development Agenda‟ (2015) <https://www.un.org/sustainabledevelopment/development-agenda/>. 13
The Action Plan, 1ff. 14
12
functionality of the financial system by including long-term threads and rewards into the investors‟ decision making.15
The Action Plan asserted that corporate transparency on sustainability issues is crucial for proper assessment of long-term sustainability risks.16
The Action Plan proposed 10 specific actions to fulfil these goals. Those are: (i) establishing an EU classification system for sustainable activities; (ii) creating standards and labels for green financial products; (iii) fostering investment in sustainable projects; (iv) incorporating sustainability when providing financial advice; (v) developing
sustainability benchmarks; (vi) better-integrating sustainability in ratings and market research; (vii) clarifying institutional investors‟ and asset managers‟ duties;
(viii) incorporating sustainability in prudential requirements; (ix) strengthening sustainability disclosure and accounting rule-making; and (x) fostering sustainable corporate governance and attenuating short-termism in capital markets.17
The Action Plan emphasised the importance of developing EU taxonomy on
sustainable actions as it was expected to serve as at least an auxiliary tool for other actions. For some actions, such as developing standards and labels, calibration of prudential
requirements or use of low-carbon benchmarks, and developing EU taxonomy on sustainable actions was considered to be a pre-condition.18
2.2 The Action Plan Implementation
The Commission started the implementation of the Action Plan by developing the following legislative proposals: (i) the proposal for the regulation of the framework establishment to facilitate sustainable investment, (ii) the proposal for a regulation of
disclosures relating to sustainable investments and sustainability risks, (iii) and the proposal for a regulation amending the benchmark regulation.19 These pieces of legislation have been in the spotlight of the Commission from the beginning of the Action Plan implementation process. 15 ibid 1 – 3. 16 ibid 3. 17 ibid 4 – 11. 18 ibid 11. 19
Commission, „Frequently Asked Questions on Commission Technical Expert Group on Sustainable Finance Questions‟ [2018]
<https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/sustainable-finance-teg-frequently-asked-questions_en.pdf>, 1.
13
Along with these propositions, the Commission set up the Technical Expert Group on Sustainable Finance (the „TEG‟). TEG was assigned to assist the Commission with
developing legislation pieces based on the three proposals mentioned above. Besides, TEG was assigned to assist with the development of the EU Green Bond Standard. TEG was entrusted to continuously consult the Commission on environmental and climate policy developments to ensure that the Commission‟s activities dynamically reflect the innovations of policies and technologies.20 The primary mandate of TEG, which started in summer of 2018, was planned to end in June 2019. However, the mandate has been extended twice. The current expectation is that TEG will operate until 30 September 2020.21 Additionally, the Action Plan predicted the support of the ESAs, the EEA, the European Investment Bank, and the Eurostat along with cooperation with the EU member states and other counterparties.22
In order to start an international cooperation on sustainable finance, the International Platform on Sustainable Finance (the „IPSF‟) has been launched. So far, Argentina, Canada, Chile, China, India, Kenya, Morocco, Indonesia, Norway, Switzerland, Singapore and New Zealand have united to support the activities of IPSF.23 The activity of IPSF demonstrates a vivid example of international cooperation under Art. 21(2)(f) of TEU, i.e. international cooperation with regard to preserving and improving the quality of the environment and the sustainable management of global natural resources, in order to ensure sustainable
development.
More tangible results of implementation, residing in enacting legal acts, have also been achieved. Nonetheless, some legal acts are yet to be enacted.
First of all, the SFDR has been adopted.24 The main objectives of the SFDR are to strengthen the protection of the end investors, and to improve information disclosures to them. The SFDR lays down harmonised rules for financial market participants and financial
20
Commission, „State-of-play of Technical Expert Group on Sustainable Finance (TEG)‟ [2018] <https://ec.europa.eu/info/sites/info/files/180730-teg-statement_en.pdf>, 1.
21
Commission, „Second extension of the mandate of the Technical expert group on sustainable finance (TEG)‟ [2019]
<https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/191219-sustainable-finance-teg-extension_en.pdf>, 1 – 2.
22
The Action Plan, 12. 23
Commission, „International Platform on Sustainable Finance: The ultimate objective of the IPSF is to scale up the mobilisation of private capital towards environmentally sustainable investments‟ (Commission)
<https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/international-platform-sustainable-finance_en>.
24
14
advisers on transparency. These concern the integration of sustainability risks and consideration of the adverse sustainability impacts in their processes, and provision of sustainability‐related information with respect to financial products.25
The Regulatory
Technical Standards, which should be adopted as a delegated act by the Commission in order to supplement the SFDR, are expected to set up general principles of the ESG disclosures along with specific rules on how such disclosures should be performed. So far, ESAs has issued a draft of Regulatory Technical Standards, which has been under public consultation. The enacting of Regulatory Technical Standards has therefore not been on the agenda.26 The selected provisions of the SFDR are assessed more thoroughly in Section 4.2.
Secondly, the Taxonomy Regulation has been adopted.27 The Taxonomy Regulation builds on Art 3(3) of TEU, which aims to establish an internal market that works for the sustainable development of Europe, based on, among other things, balanced economic growth and high level of protection and improvement of the quality of the environment.28 Although not mentioned explicitly by the Taxonomy Regulation, it also contributes to the EU‟s goals to define and pursue common policies and actions to foster the sustainable economic, social, and environmental development of Third World countries, with the primary aim of
eradicating poverty and to help develop international measures to preserve and improve the quality of the environment and the sustainable management of global natural resources, to ensure sustainable development.29 The Taxonomy Regulation can be considered as an
indispensable prerequisite for the proper functioning of the SFDR, as it establishes the criteria for determining if an economic activity is environmentally sustainable to establish the degree of environmental sustainability of an investment.30 Although the delegated act anticipated by the Taxonomy Regulation has not been adopted yet, the Commission plans to adopt it after an impact assessment will have been carried out and the subsequent feedback from stakeholders
25
The SFDR, Recitals 4, 5, 9, 10, 12, 15, 19, 23, 24, 25 and Art. 1. 26
European Supervisory Authorities, „Joint Consultation Paper on ESG disclosures standards for financial market participants of the European Supervisory Authorities‟ (EBA, EIOPA and ESMA, 2020)
<https://eba.europa.eu/sites/default/documents/files/document_library/Publications/Consultations/2020/Joint%2 0Consultation%20Paper%20on%20%20ESG%20disclosures%20standards%20for%20financial%20market%20
participants/882742/JC%202020%2016%20-%20Joint%20consultation%20paper%20on%20ESG%20disclosures.pdf>. 27
The Taxonomy Regulation. 28
The Taxonomy Regulation, Recital 1. 29
The TEU, Art 21 (2). 30
15
will have been received.31 For more scrupulous assessment of the selected provisions of the Taxonomy Regulation, see Section 4.3.
Thirdly, the Benchmark Regulation Amendment has been adopted.32 But let‟s start with the Benchmark Regulation. The Benchmark Regulation contributes to the proper functioning of the EU market by setting a common framework to ensure the accuracy and integrity of indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds. It also contributes to consumer and investor protection.33 The Benchmark Regulation Amendment enriched the Benchmark Regulation by provisions introducing two entirely new benchmarks and procedures of sustainability-related disclosures related to these benchmarks.34 It ought to be mentioned that although it has been less than a year since the enactment of the Benchmark Regulation Amendment, three
delegated regulations anticipated by this regulation have already been adopted.35 Further assessment of the Benchmark Regulation as amended by the Benchmark Regulation Amendment is presented in Section 4.4 (the consolidated version will be from now on referred to as Benchmark Regulation).
It also should be mentioned that the Commission, upon TEG report and public consultation, issued guidelines on non-financial reporting under the Accounting Directive.36 To provide a little background, after being amended by the NFRD, the Accounting Directive established obligations to large undertakings37 (not only to financial market participants or financial advisers) to include in their management report a non-financial statements
containing information on environmental, social, and employee matters, on respect for human rights, anti-corruption and bribery matters, and on diversity in company boards. 38
31
Commission, „EU taxonomy for sustainable activities‟ (Commission) <https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en>.
32
The Benchmark Regulation Amendment. 33
The Benchmark Regulation, Art. 1. 34
The Benchmark Regulation Amendment, Art 3(1)[1]. 35
Commission, „EU climate benchmarks and benchmarks - ESG disclosures: Works to enhance the ESG transparency of benchmark methodologies and to put forward standards for the methodology of low-carbon benchmarks in the Union‟ (Commission) <https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-climate-benchmarks-and-benchmarks-esg-disclosures_en>.
36
Commission, „Commission guidelines on non-financial reporting‟ <https://ec.europa.eu/info/publications/non-financial-reporting-guidelines_en#climate>
37
Under the Art. 1 of the NFRD large undertakings are public-interest entities exceeding on their balance sheet dates the criterion of the average number of 500 employees.
38
16
Adopting EU Green Bond Standards is currently in progress. As communicated by the Commission, the latest development is publishing TEG report on the EU Green Bond
Standard,39 on-going public consultations on the renewed sustainable finance strategy and targeted consultation on the establishment of the EU Green Bond Standard. These
consultations are planned to be finalised in July 2020 and October 2020, respectively. The Commission plans to adopt a decision on how to put the EU Green Bond Standard forward in the last quarter of 2020.40
Apart from the steps mentioned above, the work on the Action Plan implementation into the rest of the financial sector legislation is in progress. The most significant documents in this regard are represented by (i) ESMA‟s technical advice to the European Commission on integrating sustainability risks and factors in the UCITS Directive and AIFMD,41
(ii) ESMA‟s technical advice to the European Commission on integrating sustainability risks and factors in MiFID II,42 and (iii) EIOPA‟s Technical Advice on the integration of
sustainability risks and factors in the delegated acts under Solvency II and IDD.43 Further work on implementation goals of the Action Plan is in rapid progress and should be subject to further documenting.44
In light of steps already taken and those planned to be, it can be concluded that the nature of the Action Plan was not a mere political statement but it represented a structured strategy, under which the Commission works on implementing a set goals into the already developed financial system, and on supplementing the financial system with novel and necessary extensions.
39
Technical Expert Group on Sustainable Finance, „Report of the Technical Expert Group on Sustainable Finance on EU Green Bond Standard‟ [2020]
<https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190618-sustainable-finance-teg-report-green-bond-standard_en.pdf>.
40
Commission, „EU Green Bond Standard‟ (Commission) <https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-green-bond-standard_en>.
41
European Security and Markets Authority, „Final Report: ESMA‟s technical advice to the European Commission on integrating sustainability risks and factors in the UCITS Directive and AIFMD‟ [2019]
<https://www.esma.europa.eu/sites/default/files/library/esma34-45-688_final_report_on_integrating_sustainability_risks_and_factors_in_the_ucits_directive_and_the_aifmd.pdf>. 42
European Security and Markets Authority, „Final Report: ESMA‟s technical advice to the European Commission on integrating sustainability risks and factors in MiFID II‟ [2019]
<https://www.esma.europa.eu/sites/default/files/library/esma35-43-1737_final_report_on_integrating_sustainability_risks_and_factors_in_the_mifid_ii.pdf>. 43
European Insurance and Occupational Pensions Authority, „Technical Advice on the integration of sustainability risks and factors in the delegated acts under Solvency II and IDD‟
<https://register.eiopa.europa.eu/Publications/EIOPA-BoS-19-172_Final_Report_Technical_advice_for_the_integration_of_sustainability_risks_and_factors.pdf >. 44
17
In the next Section, I discuss implementation of the European Green Deal.
2.3 The European Green Deal
In order to understand the latest developments in the field of sustainable finance in the EU, one cannot avoid mentioning the European Green Deal introduced by the Commission on 11 December 201945. In this document, the Commission expressed a belief that the current urgent challenges concerning the climate change can be transformed into an opportunity to reroute the EU economy and society to a more sustainable path. As a factual follow-up to the Action Plan, the European Green Deal presented a roadmap of key policies and measures to achieve a sustainable future.46
Apart from setting new, deeply transformative policies,47 the Commission committed to adjusting all EU policies in a way that sustainability becomes mainstream. Tools by which such a reform is planned to happen include an acknowledgement of a key role of the private sector in financing green transition.48 The Commission decided to present a renewed
sustainable finance strategy by the end of the third quarter of 2020, which should focus on (i) strengthening the foundations for sustainable investment, (ii) increasing investment
opportunities for investors and companies by improving access to credible information about sustainable investments (e.g. via convenient labels or standards), and (iii) managing climate and environmental risks and integrating them into the financial system.49
The European Green Deal stressed the importance of global response to challenges of climate change and environmental degradation. Moreover, the Commission expressed will
45
The European Green Deal. 46
ibid 1 – 3. 47
Deeply transformative policies under the European Green Deal are: (a) Increasing the EU‟s climate ambition for 2030 and 2050; (b) Supplying clean, affordable and secure energy; (c) Mobilising industry for a clean and circular economy; (d) Building and renovating in energy and resource-efficient way; (e) Accelerating the shift to sustainable and smart mobility; (f) Designing a fair, healthy and environmentally-friendly food system („Farm to Fork‟); (g) Preserving and restoring ecosystems and biodiversity; and (h) A zero pollution ambition for a toxic-free environment.
48
Tools under the European Green Deal aimed to mainstream sustainability in EU policies are: (a) Pursuing green finance and investment and ensuring a just transition; (b) Greening national budgets and sending the right price signals; (c) Mobilising research and fostering innovation; (d) Activating education and training; and (e) A green oath: „do no harm‟; For further details see The European Green Deal 15 – 19.
49
18
that the EU becomes a „global leader‟ in tackling these challenges, particularly in efforts to establish „financial system that supports global sustainable growth‟.50
2.4 The European Green Deal Implementation
The goals set in the European Green Deal51 are approaching interim achievements. In fact, some of these achievements correspond partly or fully with the implementation of the Action Plan as described in Section 2.2. The ones that correspond are an adoption of the Taxonomy Regulation and of the SFDR, which should increase the disclosure of companies and financial institutions on climate and environmental data.52 Moreover, the development of labels and green standards are partly fulfilled by an adoption of the Benchmark Regulation Amendment53, however, the work on the EU Green Bond Standards is still in progress.54 Additionally, the NFRD is currently being revised. The consultation with stakeholders who might be affected by the revised NFRD has recently ended. While the outcomes are not public yet, the goal of the revision of the NFRD by the end of 2020, set up by the European Green Deal, is presumable.55 On the other hand, natural capital accounting practices await their development. The same applies to incorporating climate and environmental risks into EU prudential framework.
As anticipated by the European Green Deal, the Proposal for European Climate Law has been issued by the Commission.56 The European Climate Law is meant to enact a trajectory for achieving climate neutrality and adaptation to climate change. It introduces a framework for implementing policies defended by the European Green Deal into the current and future EU policies as the contribution of all economic sectors is argued to be needed.57 The European Climate Law adoption would be an undisputable leap forward towards setting a base for all environment related legislations. Although the Proposition for European
Climate Law has relatively vague goals (for instance, the obligation of EU and member states to ensure continuous progress in enhancing adaptive capacity, strengthening resilience and
50 ibid 20 – 22. 51 ibid 16 – 17. 52
The SFDR and the Taxonomy Regulation. 53
The Benchmark Regulation Amendment. 54
Commission (n 40). 55
Commission (n 36) 56
The Proposal for European Climate Law. 57
19
reducing vulnerability to climate change),58 especially when it comes to procedures how to achieve them and how to control mechanisms to assess fulfilling these goals (for instance obligation of Commission to assess consistency and adequacy of national measures every 5 years without stating clear criteria for such assessment),59 it sets a consistent framework for EU environment related legislation and is capable of supporting future obstacles on the way to achieving a climate-neutrality objective. Even if the only contribution of the European Climate Law would be binding relevant EU institutions and member states to support climate-neutrality objective stated in Art. 2(2) of the Proposal for European Climate Law, enacting such regulation would be a significant success.
The aspect which brings the most credibility to intentions of the European Green Deal is in my opinion expressed in will of the EU to become a „global leader‟ in tackling the challenges of climate change and environmental degradation. In my opinion, in order to make political statement of this calibre, and more importantly to adhere to it in the future (i) it is necessary to keep an open mind in the process of cooperation, (ii) to have the will to take steps the positive effects of which have not yet been acknowledged by global counterparties and thus such steps do not necessarily make financial sense at this point, and (iii) it is crucial to possess the will to continue in the pursuit of the goal even if the support of global
counterparties is not properly working. Despite the fact that stable rhetoric of the EU
representatives supports the European Green Deal, even in the indisputably challenging first half of 2020,60 only the future will show if the goals of the European Green Deal will be met.
Having introduced the EU Sustainable Finance Framework, the Section 3 will introduce a phenomenon of greenwashing.
58 ibid, Art. 4. 59 ibid, Art. 6. 60
Andrew Bailey et al., „The world must seize this opportunity to meet the climate challenge‟ (The Guardian, 5 June 2020) <https://www.theguardian.com/commentisfree/2020/jun/05/world-climate-breakdown-pandemic>; Christine Lagarde and Luis de Guindos, „Press Conference‟ (European Central Bank, 4 June 2020)
<https://www.ecb.europa.eu/press/pressconf/2020/html/ecb.is200604~b479b8cfff.en.html>; Commission, „Remarks by President von der Leyen at the joint press conference with Angela Merkel, Federal Chancellor of Germany, on the beginning of the German Presidency of the Council of the EU‟ (President von der Leyen, 2 July 2020) <https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_20_1263>.
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3 The Phenomenon of Greenwashing
The general characteristic of greenwashing, which can be obtained from studying the Action Plan, the European Green Deal, or simply from the media,61 is that it is an
unpropitious activity with negative effects and that it is in the society‟s best interest to reduce this activity to the minimum. Notwithstanding some of the voices claiming that the current EU policy is not effective in tackling ecological challenges and that „status quo is not enough‟,62
there are not many controversies in admitting that greenwashing is an obstacle to the efforts of tackling environmental issues.
In order to present greenwashing phenomenon, this chapter will start with a definition of greenwashing where the introduction of the term is followed by developing the novel approach to the definitions of greenwashing and is finalised by various perspectives on greenwashing (Section 3.1). Later, it will summarise the drivers of greenwashing (Section 3.2). Finally, it will discuss the effects of greenwashing (Section 3.3).
3.1 Definition of Greenwashing
3.1.1 In Search of Definition
The first use of the term „greenwashing‟ dates back to 1986. It was used in an article examining the practice of promoting towel reuse in the hospitality industry.63 Later, the definition of greenwashing appeared in the Concise Oxford English Dictionary. It defined greenwashing as: „Disinformation disseminated by an organization to present an
environmentally responsible public image; a public image of environmental responsibility promulgated by or for an organization, etc., but perceived as being unfounded or intentionally misleading.‟64
The Action Plan defined greenwashing as „use of marketing to portray an
61
See for instance Milan Maushart and Mischa Snaije, „Greenwashing: The Good, the Bad and the Ugly‟ (International Young Naturefriends, 2017) <http://www.iynf.org/2017/12/greenwashing-good-bad-ugly/>; Patricia M. Liceras, „The EU establishes rules to identify green investments and combat greenwashing‟ (Tomorrow Mag, 2020) <https://www.smartcitylab.com/blog/urban-environment/the-eu-establishes-rules-to-identify-green-investments-and-combat-greenwashing/>.
62
Yanis Varoufakis and David Adler, „The EU‟s green deal is a colossal exercise in greenwashing‟ (The Guardian, 2020) <https://www.theguardian.com/commentisfree/2020/feb/07/eu-green-deal-greenwash-ursula-von-der-leyen-climate>. 63 de Freitas Netto et al (n 4) 6. 64 ibid.
21
organization‟s products, activities or policies as environmentally friendly when they are not‟.65
Lots of other definitions emerged throughout the last decades. Approaches to understanding the term have been thoroughly and systematically summarised by de Freitas Netto et al.66
De Freitas Netto et al. differentiate two groups of greenwashing definitions. The first covers claim greenwashing, where reference to the ecological benefits of a product or service is being made and which provide a misleading environmental claim. There are various
features of such claims that can constitute greenwashing activity. Some of those are (i) hiding a trade-off, (ii) not including a proof of positive environmental impact, (iii) presenting a vague claim creating possible misunderstanding of the communication recipient, (iv) worshipping false labels that do not provide substantial referral value, (v) presenting an irrelevant fact that blurs the overall impact of the claim, and (vi) making a claim reinforcing a false hope for the recipient. The second group is executional greenwashing, which does not necessarily provide the recipient with a tangible claim, however, it uses other features of communication to arouse impression of environmentally beneficial effects. Such features of communication might take a form of employing colours, sounds, or objects that evoke environmentally beneficial activities.67
Seele and Gatti present the other point of view. According to these authors, when defining greenwashing, the accusation element should be included. They accentuate that there is no greenwashing if there is no accusation of greenwashing. The authors base their
conclusion on the claim that greenwashing happens „in the eye of the beholder [of activity in question] and it lies in the unstable balance between expectations, messages, and
perceptions.‟68
As de Freitas Netto et al. point out, the general definition of greenwashing has not been adopted due to the multidisciplinary characteristics of greenwashing activities.
Moreover, there is no consensus on relating greenwashing phenomena only to environmental issues, as some authors apply the term „greenwashing‟ to both environmental and social
65
The Action Plan, 7. 66
de Freitas Netto et al. (n 4). 67
de Freitas Netto et al. (n 4) 8 – 10. 68
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issues.69 Conversely, Berliner and Prakash subsume both environmental and social issues (human rights in particular) under the term bluewashing. These authors circumscribe
bluewashing as behaviour of members of the UN Global Compact70 who care about the goals only for effect.71 These goals include following principles from the areas of Human Rights, Labour, Environment and Anti-Corruption. Berliner and Prakash liken the term to
„figuratively [draping] (…) in the blue UN flag to burnish (…) reputations and distract stakeholders from (…) poor environmental or human rights records‟.72
On the other hand, there are some certainties. What I deduce from literature research is that when speaking about the definition of greenwashing, the authors under this term never understand a corporate governance deception per se but only as an enabler of environmental (or social)
greenwashing.
3.1.2 Novel Perspective to Studying Greenwashing Definitions
In order to contribute to the work of de Freitas Netto et al. and other literature, I developed a novel perspective to studying greenwashing definitions. This perspective points out that different definitions from different sources may emphasize other features of
greenwashing. The adopted classification of approaches to studying greenwashing definitions also enhances the perception of greenwashing definition as an output of certain author‟s activity enabling to take this fact into account.
I discern three approaches on defining „greenwashing‟. The first is the activity-focused approach, where the activity itself stands in the spotlight. This approach is for instance represented by (i) the above-mentioned definition from the Concise Oxford English Dictionary, (ii) definitions emphasizing selective disclosure, where a „greenwasher‟ states an only positive fact about environmental performance, omits to communicate a negative environmental performance or do both,73 or (iii) definitions describing greenwashing as an
69
de Freitas Netto et al. (n 4) 10. 70
UN Global Compact is a global corporate sustainability initiative existing under the auspice of United Nations. UN Global Compact propagates principles from areas of Human Rights, Labour, Environment and Anti-Corruption.
71
Daniel Berliner and Aseem Prakash, „“Bluewashing” the Firm? Voluntary Regulations, Program Design, and Member Compliance with the United Nations Global Compact‟ (Policy Studies Journal, Volume 43, Issue 1, 2015) <https://onlinelibrary.wiley.com/doi/full/10.1111/psj.12085?casa_token=fAehhSOTp7AAAAAA%3AZjdqz6rx Vd81miNq8-tS4EEpC5V3Xa4l6MYMj6yGl-thdMh3ek378-lzk93bAf3maQGhWcS6e9qHU4ZWLQ>, 116. 72 ibid 116 – 121. 73
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act of decoupling,74 where the mismatch between substantive facts and symbolic appearances exist.75 These descriptions emphasize the activity of greenwashing.
The second is the subject-focused approach, where the incentives of „greenwasher‟76 are stressed. This perspective is based on an assumption that „organizations engage in environmental and social marketing to attain corporate legitimacy‟.77
Corporate legitimacy may be described as social acceptance of entity which enables the organisation to benefit from interactions with its environment.78 The fact that some companies resort to exaggerate or even provide false claims in order to benefit from corporate legitimacy does not need to be explained any further. The greenwashing represents a textbook example of such an activity. This approach is used in chapter 3.2 to present greenwashing activity drivers.
The third is object-focused approach. It emphasizes the effects of greenwashing activity. Employing this approach can be demonstrated by differentiating between company-level and company-level greenwashing. Literature mainly focuses on product/service-level greenwashing.79 This approach is used in chapter 3.3.
It ought to be mentioned that in most definitions, a combination of these three approaches is used. With that being said, sources discussing the definitions of greenwashing are often inclined to using one approach more than the others
3.1.3 Greenwashing vs. „ESG-washing‟
I do believe that clarity in defining greenwashing is prerequisite for an accurate description of the activity, understanding the phenomenon and trouble-free implementing policies related to the phenomenon. In order to enhance clarity of definition of greenwashing, I propose to differentiate between „washing‟ activities with respect to all three parts of ESG activities (Environmental, Social and [Corporate] Governance) even though in practice they may be interconnected thus the division line between them may be blurred.
74
For further explanation of decoupling see Andras Tilcsik, „From Ritual to Reality: Demography, Ideology, and Decoupling in a Post-Communist Government Agency‟ (Academy of Management Journal, 2010, Vol. 53, No. 6, 1474–1498) <http://www-2.rotman.utoronto.ca/facbios/file/amj.pdf>.
75
de Freitas Netto et al. (n 4) 6. 76
A person or an entity performing greenwashing. 77
Seele and Gatti (n 5), 241. 78
On corporate legitimacy see Andreas Georg Scherer and Guido Palazzo and David Seidl, „Managing Legitimacy in Complex and Heterogeneous Environments: Sustainable Development in a Globalized World‟ (Journal of Management Studies 50, 2013) <https://onlinelibrary.wiley.com/doi/epdf/10.1111/joms.12014>. 79
24
When speaking about environmental issues, I propose to use the term „greenwashing‟.80
When discussing social issues, I propose to use term „bluewashing‟. Lastly, when examining (corporate) governance the term „governance whitewashing‟.81
With that being said, this paper focuses neither on bluewashing nor on governance whitewashing that has no impact on environmental issues.
3.2 Drivers of Greenwashing
The central question to which this Section 3.2 seeks to find an answer is what drives companies to participate in greenwashing activities. First of all, what is the companies‟ motivation to take pro-environmental action? In other words, what drives a company to be „green‟ and not „brown‟? This question is examined in Section 3.2.1. Afterwards, what is the companies‟ motivation to mimic being a „green‟ company, even if it is a „brown‟ one in reality? This question is examined in Section 3.2.2.
3.2.1 Drivers to Be a „Green‟ Company
Delmas and Toffel argue that companies (as an example of organisations to which their research relates) are pressured by the market and non-market stakeholders. The authors suggest that the responsiveness to these pressures depends on the department of a company which handles these pressures. The authors also indirectly suggest that the pressure from non-market stakeholders such as regulators, NGOs, local communities, or media motivate a company to be compliant with expectations but it does not motivate it to overcome these expectations. In other words, they try but not too hard. On the other hand, the pressure from market stakeholders such as customers, suppliers, and competitors might have a potentially infinite upside for society in particular, with regard to environmentally beneficial actions.82
The other group of stakeholders, who may put a pressure on a company to be „green‟, are those who are directly linked to the company such as shareholders, member of boards, managers, employees and others. At this point, let me introduce the „green‟ influence of
80
Following definition adopted in the Action Plan, 7. 81
For an example of similar utilization of the term „whitewashing‟ in context of peer-to-peer networks see Arun M Kudtarkar and S. Umamaheswari, „Avoiding white washing in P2P networks‟ (IEEE, 2009)
<https://ieeexplore.ieee.org/abstract/document/4808847?casa_token=SpydvSLDnLYAAAAA:gnFSxRIyhfGsc0 sCaVyGFODRdkJa-r8r82uCWA27FKHSHCnzY3X216VFmq4OApEXM3UpZB5pUxk>; and
M Feldman at al., „Free-riding and whitewashing in peer-to-peer systems‟ (IEEE, 2006)
<https://ieeexplore.ieee.org/abstract/document/1626427?casa_token=s_IwCTU27RwAAAAA:MiOuac6v53YF2 6Kv5cRw873pP5Me0a5u8Vuq7glnWfESLrE0HT8E9nx63d6NH93zac-L9blDe1c>.
82
Magali A Delmas and Michael W Toffel, „Organizational Responses to Environmental Demands: Opening the Black Box‟ (Strat. Mgmt. J., 29: 1027–1055, 2008), 1048 – 1050.
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shareholders who arguably possess the biggest power to influence a company. As Hart and Zingales show, separating money-making activities from ethical activities is not always the way the shareholders with ESG concerns want to employ their funds. These authors argue that if we suppose the existence of a shareholder who values money yield as well as the positive externality produced by a company, it is possible for him or her to combine these effects and become an equity holder of such a company that also combines focuses on money yield as well as the positive externalities.83 This means that a shareholder does not have to separate fulfilment of his or her dual needs. Instead, a shareholder can just get the best „yield‟ by investing into the right company. Hart and Zingales thus conclude that the „shareholder welfare and market value are not the same‟.84
This conclusion shows that if a shareholder perceives that the „yield‟ may be increased by reorienting the company from being „brown‟ to being „green‟, he may want to exert a pressure to achieve that, for instance by using his voting rights.
Zerbib provides a review of literature, which presented a more financially oriented perspective on the motivation to be a „green‟ company.85
He documents that some studies on the effects of companies‟ pro-social actions on themselves, examined the general corporate social performance and its effect on the financial performance of a relevant company. Most of these studies suggested that corporate social performance „has a positive impact on companies‟ financial performance.‟86
Moreover, some studies suggested that it has a positive effect on the cost of equity capital.87
83
Oliver Hart and Luigi Zingales, „Companies Should Maximize Shareholder Welfare Not Market Value‟ (Journal of Law, Finance, and Accounting, 2017, 2: 247–274)
<https://scholar.harvard.edu/files/hart/files/108.00000022-hart-vol2no2-jlfa-0022_002.pdf>, 247 – 275. 84
ibid. 85
Olivier David Zerbib, „The effect of pro-environmental preferences on bond prices: Evidence from green bonds‟ (Journal of Banking and Finance, Vol. 98, January 2019).
86
ibid 41 – 42. 87
26
In the last couple of years, the major part of related research has been dedicated to the so-called „green bond market‟. The green bonds can be described as „fixed income securities which finance investments with environmental or climate-related benefits‟.88
In the last couple of years, the major part of related research has been dedicated to the so-called „green bond market‟. The green bonds can be described as „fixed income securities which finance investments with environmental or climate-related benefits‟.89 The recent findings presented by Zerbib90 and Tang and Zhang91 on relationship between a company‟s cost of debt capital and of the company‟s „greenness‟ suggest that there are positive effects of green bond issuance on the financial situation of the issuer (in some cases even on the cost of capital in particular) when compared to the „plain vanilla bonds‟. On the other hand, there are plenty of papers that suggest otherwise.92
We can see that not only the pressure from companies‟ stakeholders, but effects of lower cost of capital, both from equity and debt sources, represent an argument for a
company to be „green‟. It is tempting to conclude that being „green‟ is always beneficial for a company, however, it should be noted that in order to come to the abovementioned
conclusions, statistical methods were used, thus specific affairs of particular company still play a decisive role.
3.2.2 Drivers of „Greenwashing‟
Having presented possible motivations of a company to be „green‟, companies‟ general motivation to „greenwashing‟ is intuitively clear. It includes the will to extract the benefits of being „green‟ and to not bear the associated costs (for simplicity I assume internal factors, such as moral problems, to be, in a sense, the cost). Also, it ought to be mentioned
88
Torsten Ehlers and Frank Packer, „Green bond finance and certification‟ (BIS Quarterly Review, September 2017) <https://poseidon01.ssrn.com/delivery.php?ID=805083115115087065003091103122108124020009058049034 037091095014006029071088002027124013048012118102116115018088106010004030065026033071081039 083105029125119117116019023022010091073092065106094103001103113003014116066110088113103122 118024006073091020003&EXT=pdf> , 89. 89 ibid. 90 Zerbib (n 85) 50 – 51. 91
Dragon Yongjun Tang and Yupu Zhang, „Do shareholders benefit from green bonds?‟ (Volume 61, 101427, 2020)
<https://www.sciencedirect.com/science/article/pii/S0929119918301664?casa_token=XsmRA0YiciwAAAAA:i v8Otq_3L8opZG57TEk4ctPlHCqIuvtVmyJFjGWANqwzJznMJPr8sEDbHB8ZZ93led3udg4f-Bo#fn0010>. 92
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that benefits and costs, are not necessarily expressed in the form of funds, but may also be expressed as a reputation, for instance.
Delmas and Burbano employ a more schematic approach to present greenwashing drivers. They introduce a matrix of greenwashing drivers and participants of greenwashing activities. They categorize greenwashing drivers into four groups and draw relations between them.
(i) The first group is non-market external drivers. These include uncertain regulatory environment caused by non-harmonised regulations of heterogeneous regulatory
environments (this effect is apparent in case of a multinational corporation which has to adhere to the rules set in each jurisdiction)93, the uncertain regulation, or the regulation with lack of enforceability. Non-market external drivers also include the pressure from activists, NGOs, or media.94
(ii) The second group is market external drivers. These include consumers who pressure organisations into „green‟, investors, or competition.95
(iii) The third group is organisational-level drivers. These include firm specifics (for instance, publicly traded companies in consumer product industry with relatively small margins are less prone to greenwashing), incentive structure and ethical climate (a company environment where managers are incentivised by remuneration dependant on arbitrary financial goals, and where an egoistic ethical climate is widespread, greenwashing activity is likely to happen; in contrary, a company environment with consistent managers‟
remuneration plan and principle-driven ethical environment lower the chances of
greenwashing), organisational inertia (an older and larger firms which have strong persistence to status quo are harder to be redirected by managers even in cases where managers do their best to make a company „green‟ and communicate in such manner with the public) and effectiveness of intra-firm communication (lack of elasticity in intra-firm communication
93
The existence of such driver with respect to divergence of ESG ratings is documented. See Florian Berg, Julian Kölbel and Roberto Rigobon, „Aggregate Confusion: The Divergence of ESG Ratings‟ (May 17, 2020) <https://ssrn.com/abstract=3438533 or http://dx.doi.org/10.2139/ssrn.3438533>.
94
Delmas and Burbano (n 6) 8 – 18. 95
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contribute to disharmony between communication department and internal implementation of company‟s „green‟ policies).96
(iv) The fourth group is individual-level psychological drivers. These are represented by narrow decision framing (where communication about the „greenness‟ is not in
concurrence with company‟s capabilities to implement these goals, the risks of greenwashing exist), hyperbolic intertemporal discounting (discrepancy between short-term outlooks such as a decision on communicating that the company is „green‟, which benefits company now and long term outlook where the real costs of communicated actions projects, create breeding ground for greenwashing), and optimistic bias (unrealistic positive self-evaluation, unrealistic optimism about future events, and plans or an illusion of control may cause discrepancies between communication and implementation of green policies, and thus can cause a greenwashing).97
In my opinion, the red thread winding throughout this matrix is a mismatch between short term and long term considerations.
This matrix represents the most complex system of greenwashing drivers described by literature. In my opinion, it is the most suitable starting point for the assessment of any
greenwashing risks, including those in financial system. I therefore use precisely this matrix in order to assess greenwashing risks in EU Sustainability Finance Framework, which I discuss in Section 4.
3.3 Effects of Greenwashing
As mentioned in the beginning of Section 3, the perception of greenwashing is vastly negative. This chapter introduces the reasons for such a perception. In particular, I will introduce five perspectives of how the effects of greenwashing may be looked at, as found in the literature. I distinguish between consumer perspective, investor perspective, competition perspective, perspective of a „greenwasher‟, and society perspective.
Firstly, from the perspective of consumer, greenwashing has a negative consequence as it misleads the consumer about his or her choice of product or service supplier (or a product or service itself). Assuming that „greenness‟ of a product, service, supplier, or
provider respectively, influence consumer decision making, the negative effect is apparent as
96 ibid. 97
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it can mislead the consumer, who may then decide incorrectly (taking into account his, her or its true need).98
Secondly, when taking into account the perspective of an investor (imagine an end investor looking to invest its fund to „green‟ equity or debt), we come to a very similar conclusion. Misleading the investor would hardly benefit him or her. Also, as correctly pointed out by Delmas and Burbano, „greenwashing may negatively affect investor confidence in environmentally friendly firms, eroding the socially responsible investing capital market‟.99
Thirdly, from the perspective of competition, greenwashing has a negative impact on the „green‟ company that competes with the „greenwasher‟, as the benefits from being „green‟ are misappropriated by a „greenwasher‟. As Furlow points out, this negative effect
consequentially causes the environment of questioning companies‟ honesty and deprives the honestly „green‟ companies of their competitive edge.100
As the perspective of a „greenwasher‟ has been already examined in Section 3.2.2, both mine intuitive cost-benefit assessment and assessment of motivations according to Delmas and Burbano are discussed above.
The last considered perspective is one of society as a whole. It ought to be said that all four perspectives form, at least to a certain extent, the effect of greenwashing on the society. However, stating that the effect on the society is only the sum of the previous four
perspectives would be incorrect.
There are two additional effects. The first effect is based on the fact that establishing a well-functioning EU Sustainable Finance Framework described in Section 2 has wider
benefits than only the ones resulting from consumer protection, investor protection,
competition protection, or „greenwasher‟ benefits. The overarching benefit of rerouting the EU economy to sustainable path is capable, in my opinion, of making the EU economy less prone to the negative effects of economic, natural, or social cycles. The negative effect of
98
To further study consumer protection from greenwashing see Commission, „Consumer protection policies, strategies and statistics.‟ <https://ec.europa.eu/info/policies/consumers/consumer-protection_en>; and Menno D. T. de Jong and Karen M. Harkink and Susanne Barth, „Making Green Stuff? Effects of Corporate Greenwashing on Consumers‟ (Journal of Business and Technical Communication 32 (1): 77-112, 2018)
<https://journals.sagepub.com/doi/pdf/10.1177/1050651917729863>. 99
Delmas and Burbano (n 6) 3. 100
30
greenwashing from the perspective of the society is thus obstructing this change by making regulations establishing the EU Sustainable Finance Framework less efficient.
The second effect is based on the arguments presented by Wu, Zhang and Xie, which are backed by their own data research. The authors claim that if the transparency caused by disclosure rules is too high, which makes it impossible to „greenwash‟, the effects on society are negative. 101 It ought to be mentioned that Wu, Zhang, and Xie were the only ones who presented positive effects of greenwashing. In order to present findings of the authors, I examined their model in the Appendix of this paper. In my opinion, only further data research can prove positive effects of greenwashing. The reason is that in their paper, I feel the lack of taking into account all effects of greenwashing. For instance, I lack accounting for negative financial market externality caused by inefficient allocation of funds caused by false price indication.
In conclusion, the arguments presented in this Section 3.3 favour the perspective that the effects of greenwashing are mainly negative.
4
Greenwashing in EU Sustainable Finance FrameworkIn Section 2, I have introduced the EU Sustainable Finance Framework. In Section 3, I have introduced the phenomenon of greenwashing. In Section 4 I employ the findings from these Sections. Firstly, in order to examine roles of financial system from the perspective of the EU Framework of Sustainable Finance (Section 4.1). Secondly, in order to examine the central regulations forming the EU Sustainable Finance Framework, namely the SFDR (Section 4.2), the Taxonomy Regulation (Section 4.3) and the Benchmark Regulation
(Section 4.4), and in order to inspect risks of greenwashing following from certain provisions of these regulations.
4.1 The Roles of the Financial System
According to Armour et al., there are five fundamental roles of the financial system: (i) providing a secure mechanism for payments at a distance, (ii) mobilising capital from savers who have more financial resources than uses for them, (iii) selecting the projects from amongst those seeking investment, that will yield the best return, (iv) monitoring the
101
31
performance of those projects in which investment has been made, and (v) managing risks.102 The term project means, for the purposes of this paper, the end of the chain in redistributing funds, no matter how this chain is constructed. For instance, imagine that a small company performs CSR activity where every day its employees clean a section of a stream flowing behind their offices. The small company is a daughter company of a multinational holding company which issue bonds. By buying these bonds, investors finance that CSR „project‟ (if the funds are redirected intragroup to the daughter company).
The first two rules of the financial system refer to the technical design of the financial systems and are less related to the green transition of the EU economy, thus they are not discussed in this paper. The other three roles are much more relevant.
The role of selecting project lies in providing the relevant information to help an investor decide which project should receive his or her funding. There are two effects of this role when the relevant information is efficiently provided. First is that investor invest in suitable project for him. Second is that only a good projects are supported by a class of shareholders thus only good ones are supported in existence.103 This role is crucial for green transition of the EU economy, as it enables efficient directing of the private capital towards climate and environmental actions.104
It is, however, debatable what constitute a criteria under which investor decides what the „best‟ project for him is. Armour et al. argue that it is the one that yields the best return.105
However, there is an undisputable parallel to Hart and Zingales‟ conclusions (see Section 3.2.1). Their conclusion, if applied to financial system, may be paraphrased, as „the investor welfare and the investment yield are not the same‟.106
The role of monitoring the project is even more crucial. The topic of investment monitoring pervades through the whole regulation of the financial system. The
interconnectivity with the previously mentioned role is clear, as both of them use gathering information about the project and analysing this information to enable an investor to make a well-founded choice. Regulating dealing with information about financial firms and financial
102
John Armour et al., Principles of Financial Regulation (Oxford University Press 2016), Chapter 2. 103
ibid, Chapter 2.2. 104
The European Green Deal, 2. 105
Armour et al. (n 102) Chapter 2.2. 106
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products represents one of the financial regulation strategies.107 This strategy is implemented by the EU legislation dealing with investor protection such as the MiFID II, the MiFIR, the UCITS Directive, the AIFMD, the IDD and the PRIIPs Regulation. The SFDR, the
Taxonomy Regulation, the NFRD, and the Benchmark Regulation also contribute to the permeability of information between financial market participant and financial advisor on the one side and investor on the other side. 108
The role of risks managing is highly connected to the previous two, as only with complex information about the project the assessment of the risks, which are based on those projects, can be conducted.109
In order to sum up on the role of financial system in achievement of the EU
Framework of Sustainable Finance, and in order to achieve the redirecting of private capital to climate and environmental action in particular,110 there are no better words than those of Lovisolo, who claims that „transparency across the investment value chain is what ultimately makes sustainable assets emerge, stand out and get access to capital at a lower cost.‟111
It also should be mentioned that it is believed that correcting externalities by the traditional
instruments such as taxes, subsidies, and regulation seem insufficient to climate-related challenges.112
4.2 Regulation on Sustainability-Related Disclosures in the Financial Services Sector
The SFDR aims to enhance certain disclosures to end investors in investment decision making and in advisory processes which relate to sustainability issues. These disclosures are of integration of sustainability risks, of consideration of adverse sustainability impacts, and of sustainable investment objectives (for more information see Section 2.2). In this Section 4.2, I examine crucial provisions of the SFDR and where appropriate, I give my opinion on
107
Other strategies according to Armour et al. are entry level requirements, regulation of conduct of operations, prudential regulation, governance issues, insurance matters and resolution. For further explanations see Armour et al. (n 102) Chapter 2.
108
See Siri and Zhu (n 3) 4. 109
Armour et al. (n 102), Chapter 2.2. 110
The European Green Deal, 2. 111
Elena Johansson, „EU officials put transparency at heart of ambitious Green Deal‟ (Portfolio Adviser, 2020) <https://portfolio-adviser.com/eu-officials-put-transparency-at-heart-of-ambitious-green-deal/>.
112
Serena Fatica and Roberto Panzica and Michela Rancan, „The pricing of green bonds: are financial institutions special?‟ (European Commission, 2019)
<https://publications.jrc.ec.europa.eu/repository/bitstream/JRC116157/jrc116157_faticapanzicarancan_gbpricin g_jrc_report_01.pdf>, 1.
