What is ‘sustainable finance’?
Sustainable finance is any form of financial activities and processes in the financial sectors that takes Environment, Social and Governance (ESG) into consideration.
- Environmental factors – Involves climate change mitigation and adaptation, the environment in general, such as biodiversity preservation, pollution avoidance, and the circular economy.
- Social factors – Comprises issues of inequality, inclusion, labour relations, human rights problems, investment in human capital and communities.
- Governance – Includes public and commercial organisations, including management structures, employee relations, and executive compensation, which plays a crucial role in ensuring that social and environmental factors are included in the decision-making process.
Impact investing
This is a form of investment made in businesses or organisations that seeks to generate both financial returns and positive social or environmental impacts. Impact investors often focus on sectors such as renewable energy, affordable housing, and education. Impact investments are a type of responsible and sustainable investing, in addition to environmental, social, and governance (ESG) risks to operational or financial performance.
Sustainable finance regulation
Governments and regulatory bodies around the world are increasingly implementing policies and regulations to promote sustainable finance. These policies can include requirements for financial institutions to disclose their ESG practices and performance, as well as incentives to encourage investment in sustainable projects.
What do the regulations entail?
Taxonomies, product standards, disclosures, and labelling; management and disclosure of climate risks; management and disclosure of ESG risks; ESG in stewardship, and green bond rules are the main subjects in sustainable finance regulation around the world.
All regions of the world view sustainable finance regulation as essential for boosting market openness and minimising the possibility of greenwashing. The nations of the European Union continue to dominate in terms of the depth and breadth of regulatory efforts. While Asia has accelerated their pace of new initiatives, North America and Australia have also substantially boosted regulatory activity. Additionally, the United Kingdom has the most extensive regulatory structure of any country outside the EU.
Green regulatory landscape in Malaysia
Several sustainable finance guidelines addressing environmental and social (E&S) concerns have been published and these include:
Financial institutions are expected to handle climate-related risks in accordance with Bank Negara Malaysia’s Climate Risk Management and Scenario Analysis guidance (BNM) and Value-based Intermediation Financing and Investment Impact Framework (VBIAF) sector guides.
Financial institutions in Malaysia are also obligated to disclose information in accordance with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), the Climate Change and Principle-based Taxonomy (CCPT). Management of this risk would need increased deforestation- and conversion-free commitments from financial institutions and enterprises, and also a categorization system (taxonomy) based on risk for sectors and assets susceptible to biodiversity degradation. This system would potentially assist in the reallocation of capital flows from biodiversity negative to positive initiatives.
Additionally, the Joint Committee on Climate Change (JC3) is in the process of developing a data catalogue to map accessible climate data sources. This catalogue will aim to enhance disclosure and data accessibility for more openness and harmonisation, which in turn promotes improved decision-making and risk management.
BNM’s participation in the Central Bank & Supervisors Network for Greening the Financial System (NGFS) and other worldwide platforms is a driving factor for the expansion of excellent regulatory and supervisory practices. Central banks and financial regulators however would need to expedite the full deployment of their monetary policy, regulatory, and prudential powers to enable a quick and orderly transition.
What is ‘greenwashing’?
Greenwashing is a complicated and broad phenomenon that may arise at any level of the financial chain, resulting in firms being able to create misleading sustainability statements about their operations and policies to make their goods becoming more environmentally attractive. It was initially started in the 1960s, when the hotel industry faced a reduction in their laundry expenses, as they demanded that guests reuse their towels to conserve the environment. Today, brands and products have gone through multiple greenwashing processes, as they are rebranded and repackaged as eco-friendly to persuade and promote consumers on the firm’s sustainability actions.
How is Greenwashing relevant in today’s world?
According to Diab (2022), although many corporate firms will readily commit to reducing their carbon emissions, they will not react now, and this puts future generations at risk. The government’s absence of regulation and monitoring is an advantage to firms in fulfilling their green objective by maximising their green brand image at the lowest possible financial and operational cost, unfortunately resulting in insignificant environmental effects on the Earth. Apart from maximising profit, firms tend to practise greenwashing to pursue a high trajectory of business growth and shareholder value maximisation, which is unfavourable for our environment.
To illustrate, Chanel, known for its luxury fashion, has been keeping pace with the changing trends and doing its part in fighting climate change with its climate strategy, Chanel Mission 1.5° (Chanel, 2020). According to Rocha et al. (2022), Chanel borrowed €600 million from its investors by offering its sustainability-linked bonds (SLBs) with certain conditions in 2020. Its Chief Financial Officer sees SLBs as a perfect opportunity to integrate its finance strategy with its corporate strategy based on its sustainability ambitions. Investors were promised that if Chanel did not fulfil specific climate targets, extra returns had to be paid as a penalty for not meeting the targets.
Consequences of Greenwashing
Greenwashing is detrimental to both consumers and the environment. Consumers may be misled into purchasing environmentally unfriendly products that are advertised. This can lead to a waste of money as well as a loss of consumer trust in environmentally friendly products. Furthermore, by engaging in greenwashing, businesses may be able to avoid making necessary changes to their operations, which can have a negative impact on the environment. A company that claims to be environmentally responsible but continues to use hazardous chemicals in its products, for example, contributes to environmental degradation.
Ways to identify Greenwashing
Consumers must be able to recognise fraudulent or deceptive environmental claims in order to avoid being taken advantage of by greenwashing. There are several methods for detecting greenwashing, such as looking for vague or unsupported statements. A claim that a product is “eco-friendly,” for example, is ambiguous and impossible to verify, so it should be approached with caution. Another method to help avoid one from falling prey to greenwashing is to look for third-party certifications from organisations such as the Forest Stewardship Council or the Rainforest Alliance. Finally, readers of news stories or visitors to websites that track a company’s environmental performance can learn about its track record of success. Consumers can better educate themselves about which products are truly environmentally friendly and which are simply greenwashed by following these actions.
SDGs behind prevention of Greenwashing
Companies can meet at least a few of the Sustainable Development Goals (SDGs) by adopting the 6-Steps Approach that refers to the guidance from Ernst and Young Global (2017) provided in contributing and aligning their business towards the SDGs. The 6-Steps Approach are:
- Identify and commit
- Develop targets and KPIs
- Align sustainability and corporate strategy toward targets
- Create business opportunities
- Collaborate
- Measure, assess, document and communicate
In order to contribute and meet the SDGs, the companies must first realise and identify which SDGs they can commit to through their businesses. The business opportunities and interests of a company can be linked to the existing SDGs and a company’s particular choice of SDGs could form a positive loop, creating a win-win situation for both sides. Companies can start taking a strategic approach and align their corporate priorities with the relevant SDGs. This practice allows them to explore all the opportunities and come up with plans to achieve the mutual goals between the companies and SDG 17.
Second, companies can develop their targets and KPIs. They should set their own clear targets and key performance indicators (KPIs) to monitor and communicate progress towards SDGs from time to time. The companies should also adjust any existing corporate targets as well as monitoring and measurement methods to meet these new SDG targets and KPIs.
The next step is to align the sustainability and corporate strategy of the companies toward SDGs. Companies need to reassess how well existing practices are in line with the issues and targets by adjusting the business models, products and services, supply chains, and sustainability strategies towards the SDGs. Also, companies who support the SDGs can start by reducing the link between economic growth and intense use of energy, water efficiency, and lower carbon emissions.
Through proper alignment of strategies, these companies who set themselves on the path of SDGs are able to create and spot new business opportunities. This, in turn, helps the companies to grow themselves as they create more resilient and prosperous communities, enabling an expansion of their markets and a growth in consumer bases.
The fifth step is to collaborate; it is unlikely for a single company to solve any of these problems on its own, and collaboration, both within sectors and across different industries, is crucial to put the puzzle together. The companies can identify collaboration opportunities with the government, peers, customers, suppliers, academia and nonprofit organisations across various industries to achieve mutually beneficial solutions for all.
Lastly, the companies should closely measure, assess, document and communicate their actions and results to the public in order to play their part in achieving SDGs. Companies should develop a transparent system that integrates the management of SDGs’ issues into everyday business decision-making and report their accomplishments by issuing a sustainable report to communicate to the public.
The measurement of a company’s commitment towards the SDGs is dependent on each company as they tend to evaluate themselves based on their own achievements. However, referring to independent organisations such as GRI (Global Reporting Initiative) by the UN will provide a holistic and transparent view of the companies’ progress in pushing the SDGs initiatives.
Reference
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Broom, D. (2022, January 20). What is sustainable finance & how it is changing the world. World Economic Forum. https://www.weforum.org/agenda/2022/01/what-is-sustainable-finance/
Chanel. (2020, March). Chanel Mission 1.5°. https://www.chanel.com/my/climate-report/
Chater, J., Kernoghan, H., & Sigauke, G. (2022, September 21). Greenwashing – a hinderance to sustainable finance. Penningtons Manches Cooper. https://www.penningtonslaw.com/news-publications/latest-news/2022/greenwashing-a-hinderance-to-sustainable-finance
Diab, K. (2022, March 5). Why do corporations greenwash? Al Jazeera. https://www.aljazeera.com/opinions/2022/3/5/why-do-corporations-greenwash
Ernst & Young Global. (2017, March 9). Why Sustainable Development Goals should be in your business plan. Ernst & Young. https://www.ey.com/en_my/assurance/why-sustainable-development-goals-should-be-in-your-business-plan
GRI. (2022, January 17). Most companies align with SDGs – but more to do on assessing progress. Global Reporting Initiative. https://www.globalreporting.org/news/news-center/most-companies-align-with-sdgs-but-more-to-do-on-assessing-progress/
Hayes, A. (2022, November 8). What Is Greenwashing? How It Works, Examples, and Statistics. Investopedia. https://www.investopedia.com/terms/g/greenwashing.asp
NatWest. (2021, January 14). Sustainable finance a success story of change. https://www.natwest.com/corporates/insights/sustainability/sustainable-finance-a-success-story-of-change.html
Rocha, P. A., Rathi, A., & Gillespie, T. (2022, October 4). Empty ESG Pledges Ensure Bonds Benefit Companies, Not the Planet. Bloomberg. https://www.bloomberg.com/news/features/2022-10-04/greenwashing-enters-a-22-trillion-debt-market-derailing-climate-goals?leadSource=uverify%20wall
UNEP FI. (2017, June 6). The Evolution of Sustainable Finance –. United Nations Environment Programme – Finance Initiative. https://www.unepfi.org/news/timeline/
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Written By: Sylvia Chen Weng Yan, Alex Chong, Yeoh Jia Xin, Muhammad Hafizuddin Hakim Bin Ruzlisham and Sherilynn Ngerng Siew Fong
Edited By: Julia Yazid
