Greenwashing – a panel discussion

I had the honour of moderating a panel discussion on greenwashing at the CEPS Ideas Lab in Brussels. An important and timely discussion, given also recent legislative developments on the European level.  The discussion was under the Chatham House Rule, so I will only summarise the main points.

What is the problem?  There is increasing pressure on banks and other financial institutions and market participants to take into account the carbon footprint of their asset holdings. This pressure comes from the general public, investors, activist groups and regulators.  As predicted by Goodhart’s Law, once a metric (how green is a bank’s balance sheet) becomes a policy target, it ceases to be a good measure, because it becomes subject to manipulation, such as greenwashing or greenwishing.

And while one might think that transparency and court cases might be sufficient to minimize this risk, the financial sector itself has asked the European Commission to step in with their taxonomy. Given the variation in ESG ratings, an increasing numbers of greenwashing scandals and overall lack of globally agreed standards, maybe not surprising.  However, beyond setting rules and defining shades of green, one critical challenge is the lack of data!  What financial institutions also need is a change in culture (rather than renaming the CSR the ESG department, ingraining green thinking throughout the institution) and capacity building.

Focusing on the banking sector carries the risk of regulatory arbitrage – there is evidence for this on the cross-border level (here and here). There is also (anecdotal) evidence for this across segments of the financial system - the banks involved in lending to the Dakota Access Pipeline ultimately sold off their exposures to hedge funds that are not subject to the same disclosure standards.  A question of regulatory perimeter, as seen in other circumstances.

One important question is whether we are too ambitious in our expectations of the financial sector to transition from supporting brown to supporting more green industries and firms. There is clear evidence that banks might drag their feet given their asset exposure to existing traditional ‘brown’ firms and thus delay the necessary transition.  But even ignoring this incentive constraint, one might not be able to expect banks to change their portfolio composition over night; but maybe we have to be overambitious to get at least half-way there.

A final important issue I would like to flag is that the financing of the transition requires looking beyond the banking system.  Given the amount of funding needed but also the need to fund new projects and enterprises (not necessarily the forte of the banking system), there is thus a clear link to the capital market union and the strengthening of the non-bank segment of Europe’s financial sector.