In an era where environmental, social, and governance (ESG) principles are gaining traction, banks are increasingly spotlighting their sustainability efforts. However, there’s a growing concern that many of these claims might not be as green as they appear.

What is greenwashing?

Greenwashing is the act of misleading consumers about the environmental benefits of a product or service for marketing purposes. It involves practices such as overstating minor sustainability efforts or omitting unfavorable environmental impacts. It aims to create a false impression that a company’s products or services are more environmentally friendly than they truly are. This can significantly damage consumer trust and discourage sustainable choices.

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The banking industry is not immune to greenwashing. Banks may find it easier to engage in such practices due to the lack of universally agreed ESG standards, making claims harder to verify. This can erode consumer confidence and damage the overall sustainability movement.

High-profile cases

The Commonwealth Bank of Australia (CBA) has set the most ambitious targets to reduce its operational emissions. It is committed to ensuring that 100% of its energy is sourced from renewables by 2030 and has set a 42% reduction target for Scope 1 and 2 emissions, compared to the 2020 baseline. According to an article by Sustainability Sorted, as of June 30, 2022, it has provided $30.6bn in funds to support growth in sustainable industries.

However, the bank faces accusations of greenwashing related to its involvement in seven oil and gas projects. In 2021, the CBA has been involved in at least 11 more fossil fuel deals with massive expansionary plans. It has deals with Santos, Glencore, and Beach Energy—three companies with plans for new fossil fuel production projects. In August 2022, CBA co-arranged a $1bn loan to Santos and co-arranged a $16.7bn loan for Glencore, Australia’s biggest coal producer.

Elsewhere, Deutsche Bank-controlled investment firm DWS was instructed to pay $25m in September 2023 to settle charges by US regulators for misstatements regarding its ESG investing and failures in anti-money laundering policies. The SEC found that from August 2018 to late 2021, DWS made misleading claims about its ESG investment processes and did not implement the necessary policies as promised to investors. The SEC has been actively cracking down on inflated ESG claims, previously fining Goldman Sachs and BNY Mellon.

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Regulatory crackdown

Regulatory bodies are increasingly clamping down on greenwashing. The European Commission’s proposed Green Claims Directive requires the independent verification of ESG-related advertising claims. In the UK, the Competition and Markets Authority can impose financial penalties of up to 10% of annual turnover on companies found guilty of greenwashing. These measures aim to ensure transparency and accountability in ESG reporting. According to GlobalData’s 2022 ESG in Payments report, 25 of the world’s largest banks made sustainable finance commitments of over $2.5trn. However, if banks do not deliver on their declared commitments, it can be seen as a form of greenwashing.

Consequences of greenwashing

The potential consequences for banks engaging in greenwashing are significant and multifaceted. Misleading claims can erode customer confidence, leading to a loss of trust and loyalty, while public exposure to greenwashing practices can severely tarnish a bank’s image. Additionally, regulatory fines and legal action can impose substantial financial costs, and banks found guilty of greenwashing may face heightened regulatory scrutiny and additional compliance expenses. Investor disapproval is another critical consequence, as investors increasingly prioritise genuine ESG commitments, leading to potential disapproval and divestment. Overall, the repercussions of greenwashing extend beyond immediate financial penalties, affecting the long-term reputation and operational stability of banks.

As the spotlight on ESG principles intensifies, banks must navigate the fine line between genuine commitment and greenwashing. While greenwashing may provide short-term marketing gains, the long-term consequences can be detrimental. Banks must recognise that in the age of transparency, only authentic efforts will stand up to scrutiny.

Yonja Ozbengu is an Associate Analyst, GlobalData Thematic Team