All that glitters is not gold, as the saying goes, which, as it turns out, very much applies to banking and financial services providers’ sustainability claims.
On October 4, the Dutch Authority for the Financial Markets (AFM) published a set of guidelines designed to push for greater transparency on claims of sustainability made by financial institutions and pension providers in the Netherlands. According to the AFM, the guidelines aim to help market players find ways to keep their claims to sustainability accurate and clear.
In the EU, the proposed Green Claims Directive is designed to counter greenwashing activities by detailing the rules that firms need to follow when making voluntary environmental claims.
When passed, the draft legislation will become an important section of the EU’s Circular Economy Action Plan and the wider Green Deal. The directive will tackle commercial tactics applied by firms that actively mislead or entice customers to steer away from sustainable consumption choices.
While the Green Claims Directive awaits the approval of the European parliament and council, which can take up to 18 months from the date it was proposed in March 2023, Dutch regulatory bodies, like the AFM, are taking steps to help banks and financial institutions navigate the changes within the market.
The information that financial market participants provide to their customers is of the utmost importance, says Raoul Köhler, sustainable finance co-ordinator at the AFM. “We have observed that consumers are strongly guided in their investment decisions by the marketing information that they receive, so we have decided to issue the guidelines to make sure that what they get is fair, accurate and non-misleading,” he says.
Because sustainability is now a primary concern for consumers, Mr Köhler says it is paramount for the AFM to guide financial institutions in making more realistic and accurate environmental, social and governance (ESG)-linked claims. “It is our role to let the market know how they can better adhere to the overarching requirements of sustainability-linked information, and to guide them towards a more positive change,” he says.
Sustainable claims are not substantiated enough
Nowadays, prosecutors are not only focusing on the direct consequences of financial institutions selling products and services that are falsely marketed as sustainable to their customers. They are also looking more closely at the claims and pledges that firms release to the public and whether they reflect tangible sustainable actions.
According to AFM’s new guidelines, financial institutions need to ensure that sustainable claims are factually accurate without contradicting other information. They need to paint an accurate representation of a firm or a product and they need to be kept up to date. “Although we observe willingness from financial institutions to do better, we still see that some market their sustainable efforts through claims that aren’t substantiated enough,” says Mr Köhler.
Across the board, Mr Köhler says there is still a lot of room for improvement. “We come across long-term claims by firms, which are often vague, and make it very difficult for consumers to make a decision or to hold companies accountable for any wrongdoing,” he says.
Although transparency requirements for the financial sector are just emerging, Dutch banks exhibit a greater understanding of the importance of financial institutions’ alignment with ESG guidelines, as well as a means to avoid reputational issues arising from accusations of greenwashing.
“The new guidelines from the AFM do a good job at emphasising the importance of transparency and for products to be sustainable,” says Robert Spruijt, head of sustainable finance for Europe, the Middle East and Africa at Dutch bank ING.
While the guidelines are not legally binding, he says they align, to a certain extent, with existing and upcoming regulations and directives.
Mr Spruijt defines banks as “funders of the real economy”, which means they play a pivotal role in helping clients transition to net zero. He says financial institutions should be very transparent with their data when offering sustainability-linked financing and supporting their clients in the alignment of their business with market standards.
“We work with external parties to create science-based net-zero pathways for the highest-emitting sectors within our portfolio. This way, we can assess the performance of each sector and we publish the results in our yearly climate report,” says Mr Spruijt.
Clamping down on greenwashing
When it comes to greenwashing, a study from analyst RepRisk found that one in every four climate-related ESG risk incidents was linked to greenwashing, noting an increase from previous years. At the same time, banks and financial services providers saw a 70% increase in the number of climate-related greenwashing incidents.
According to RepRisk’s report, greenwashing risk exposure in Europe has accelerated as more companies experience criticism for greenwashing practices. Since 2018 and up until last year, the number of European-headquartered companies involved in at least one ESG-linked incident reached 893.
According to Mr Köhler, the growing number of greenwashing incidents being reported is, in part, the result of the increased interest in sustainability-linked matters by the public. “The trend is very clear: consumers want to be informed on the sustainability of the investments that are being made, and regulations are being introduced to facilitate that, including the Sustainable Finance Disclosures Regulation framework passed by the EU,” he says.
Mr Spruijt says that market standards are constantly evolving to keep up with ESG guidelines and to avoid instances of greenwashing. “While originally no explicit sustainable principles were laid out, increased pressure on companies to disclose their data and the introductions of new principles and taxonomies is generating more transparency within the market,” he says, adding that it is important to establish new science-based targets to measure all sustainability-linked financing better.
