Sustainable development requires financing. Banks are increasingly willing to offer “green products.” This is due, among other things, to competition for sustainable operations. Indeed, financial institutions are obliged by a series of regulations to disclose information on the share of “green” financing of a nature consistent with the Taxonomy. With market standards still forming and the number of products still relatively small, there is a risk of overuse of terms indicating that a particular financing is sustainable. Banks may mislead or provide false information that affects consumer decisions related to the products offered. Simply put, greenwashing – or ecocide – does not bypass banks.

Bank greenwashing – definition

To sort out a bit the understanding of greenwashing in the financial sector, European banking regulators, i.e. EBA, EIOPA and ESMA, published reports on progress in combating the phenomenon.

The report includes a cohesive definition in the banking sector. EBA’s report indicates:

The ESA understands greenwashing as a practice in which sustainability statements, declarations, actions or communications do not clearly and fairly reflect their background, the sustainability profile of an entity, financial product or financial services. This practice may mislead consumers, investors or other market participants.

Both unauthorized labeling of products (as sustainable) or marketing activities and deliberate selective presentation of information to customers or investors – omitting topics that indicate the non-environmental nature of activities – were identified as practices associated with greenwashing.

Threats of greenwashing to the banking sector

The EBA report also indicates what dangers of greenwashing lurk for financial companies. These include liquidity, operational and reputational risks. Each of these can threaten the bank’s health, and the EBA outlines different levels of these risks in its materials. For the bank’s reputation, it could involve an exodus of investors and customers. In terms of legal liability, misrepresentation, through false labeling of products or omission of relevant information, can lead to legal liability and related lawsuits.

Good practices to counter bank greenwashing

The report compiled by the EBA provides an overview of regulations to prevent greenwashing, as well as emerging market standards. The dynamic legal environment is highlighted. EU regulations countering these practices in the banking sector focus on fair communication – the provisions of the Markets in Financial Instruments Directive (MIFID II), as well as transparent presentation of financing information – the sustainable finance package of regulations, including, among others. EU Taxonomy, described many times in Water Matters.

Among the challenges the EBA identifies in its report are. The lack of reliable environmental, social and corporate governance (ESG) data and the related issue of uncertainty in benchmarks, standards and compliance criteria. The problem of comparability and reliability in ESG is faced by the entire banking sector.

The publication of the EBA report is another step on the road to curbing banking greenwashing. A lot is already happening, but also a lot still needs to change for it to stop being present in the market.