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  • Everything you need to know about “Sustainable Finance”

    Everything you need to know about “Sustainable Finance”

    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:

    1. Identify and commit
    2. Develop targets and KPIs
    3. Align sustainability and corporate strategy toward targets
    4. Create business opportunities
    5. Collaborate
    6. 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

    Bakken, R. (2021, August 9). What Is Sustainable Finance and Why Is It Important? Harvard Extension School. https://extension.harvard.edu/blog/what-is-sustainable-finance-and-why-is-it-important/

    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/

    World Business Council for Sustainable Development [WBCSD] & World Resources Institute [WRI]. (n.d.). A Corporate Accounting and Reporting Standard (Revised Edition). Greenhouse Gas Protocol. Retrieved December 15, 2022, from https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf

     

    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

  • Greenwashing

    Greenwashing

    Greenwashing: Misleading Consumers with “Green Marketing”

    In today’s hyper consumption-based societies, greenwashing has often become a controversy in the context of corporate social responsibility (CSR), in which a fine line can easily be crossed between the promised results and the actual results delivered. Greenwashing, modelled on “whitewashing” (referring to the cover-up of crimes, vices and scandals), is a form of marketing spin based on green marketing by providing biased interpretation to influence the public’s opinion and feelings about a company, thus deceptively distorting the company’s original objectives into environmentally-friendly initiatives, which are more appealing and approachable to the public. Essentially, greenwashing means giving false impressions or conveying misleading information to the public about how a company is geared towards green sustainability, but in reality, it is merely a symbolic reference where the actual outcomes are so little compared to what has been promised, and confuse the public concerning the issue that is attempted to be solved. Greenwashing, for example, is when a company spends more time and money claiming to be “green” and “sustainable” through marketing gimmicks, rather than implementing effective business practices that minimize environmental damage or create sustainable impact. 

     

    Actual Case of Greenwashing – Fiji Water 

    Let’s have a look into a prime example of greenwashing by Fiji Water. Fiji Water is famous for its brand identity, of which the bottled water is derived, bottled and shipped from Fiji, with the water coming from an artesian aquifer in Veti Levu (Fiji). In 2011, Fiji Water was slammed to encapsulate the essence of greenwashing, because of its bottled water marketing campaigns and commercials, typically filmed in a delightful natural setting, clashing with the reality of the plastic packaging, the carbon emissions from transporting the bottles globally, and the landfill waste after its fleeting consumption. To bring Fiji Water’s negative impact on strong relief, according to the World Health Organization (WHO), 47% of people living in Fiji do not have access to clean and safe drinking water. This consequently led to a lawsuit – a U.S. District Court class-action suit filed by a Newport, California firm on behalf of a Santa Ana woman named Desiree Worthington, accusing Fiji Water of using a practice known as “forward crediting”, essentially claiming credits for carbon reduction that may or may not take place, up to several decades in the future. In the lawsuit, Worthington argued that she purchased Fiji Water specifically for its self-titled “carbon-negative” brand label, and expected that the label meant that Fiji Water was currently reducing more carbon emissions than it was producing, which was supposed to be consistent with the company’s view to offset 120% of carbon emissions, as stated in the company website. However, under the forward crediting model, the offsets do not need to be currently occurring, as they can simply be anticipated actions, for which Fiji Water has said in a press release previously (2008) that the offsets promised to be “carbon-negative” will not be realized until the year 2037.

    Fiji Water attempts to reimagine its bottled water as the essence of nature, and with the greenwashed marketing tactics, Fiji pursues environmentally conscious consumers by framing its water bottles as a completely green and sustainable product. Through greenwashing practices, Fiji Water succeeded in framing the purchase of Fiji bottled water as a way to reduce carbon emissions and save the Fijian rainforests, by telling the consumers a one-sided story that appeals to their moral conscience, when in fact, their products are inextricably tied to pollution outcome, which leads to high carbon emissions and deforestation. 

     

    Adverse Effects of Greenwashing Practices

    According to the studies by Cone Environmental Survey (2009), it shows that consumers’ attitudes and perceptions of environmentally responsible products remain strong apart from a weak economy during that particular period. In Nielsen Media Research (2015), 66% of global consumers are proven to be willing to pay more for environmentally friendly products, especially when the company is perceived to be socially responsible. Over the years, more and more consumers become aware of environmental sustainability in their purchasing decisions, yet at the same time, the consumers remain sceptical of the green messages delivered through the company’s brand image and marketing campaigns. In Webb and Mohr’s (1998) study, half of the respondents indicated that they have negative attitudes and perceptions towards cause-related marketing, with the scepticism resulting from the company’s self-interested motives rather than altruistic motives of supporting causes for conducting such campaign, for example, to increase sales and gain more profits. As a further study extended by Anuar, Omar and Mohamad (2013), the study revealed that highly sceptical consumers tend to evaluate cause-related marketing negatively, as they are most likely to perceive cause-related marketing to be cause-exploitative rather than cause-beneficial, and this interpretation does affect their final purchasing decisions.

    Thus, greenwashing, being a corporate ethical dilemma, has disastrous consequences, evident as most stakeholders, especially consumers, communities, NGOs and public authorities, are increasingly vocal and in opposition towards this pretence of fraud. Greenwashing should be seen by all companies as a major concern, particularly in planning and implementing their CSR activities. Whether real or perceived, being labelled “greenwashed” ultimately causes the company to experience revenue downturn, devaluations, negative campaigns, media criticism and penalty fines. For instance, according to the study by Du (2015), greenwashing shows a negative relationship with companies’ cumulative abnormal returns (CAR) in the stock market, whereas reinforced corporate environmental performance shows a significantly positive relationship with CAR. Meanwhile, in a study of banks in 22 countries, Wu and Shen (2013) found a positive relationship between CSR and financial performance, but not for banks that practised greenwashing. Even if a company is not singled out, greenwashing by the competitors consequently impairs the industry and market performance (Davis, 1992). With the increase of green markets followed by greenwashing practices, more consumers are less likely to trust and support environmental initiatives through their purchasing decisions, as consumers fail to differentiate between valid and invalid claims, eventually hindering the development of a sustainable economy (Nyilasy et al., 2014). Despite the increased efforts from researchers all across the world to investigate the effects of greenwashing in marketing campaigns, the issue continues to persist due to the ineffective policies and lack of enforcement by the regulatory authorities, such as the Federal Trade Commission (FTC) in the U.S. and the Committee of Advertising Practice (CAP) in the U.K. For example, instead of mandatory policies, FTC provides voluntary guidelines for companies to follow for their green marketing claims, and this subsequently creates a gap between different companies in delivering sustainable development goals through their brands and products, which leads to the increasing number of misleading green promotional tools in the market. 

     

    How to Spot Greenwashing? 

    According to the U.K. Guide to Greenwash, there are 10 signs of greenwashing for consumers and businesses to avoid.

    1. Beware of Fluffy Language, which provides an unclear meaning or objective, e.g. “eco-friendly”, “recyclable” or “all-natural”. 
    2. Be Educated on ‘Dirty’ Companies, e.g. fast-fashion retailing companies (H&M) averagely takes about 20,000 litres of water to produce one kilogram of cotton, which is equivalent to one piece of t-shirt and a pair of jeans.
    3. Beware of Suggestive Images used in marketing campaigns, e.g. green images indicating unwarranted and unjustified green impact, for example, flowers blooming or sea sparkling. 
    4. Be Alert of Irrelevant Claims, where only one or few little green attributes are emphasized when everything else is neither green nor sustainable, e.g. aviation kerosene-based fuel is replaced with biofuel, but aircraft will still emit greenhouse gases regardless.
    5. Beware of Name-Calling,  brands and products that claim to be more environmentally friendly or sustainable than their competitors. 
    6. Evade Glamourized Claims on products of harmful nature or side effects, e.g. “eco-friendly cigarettes” or “vitamin-infused vodka”. 
    7. Beware of Jargons in product packaging and marketing tools that the mass audience does not understand, e.g. baseline performance, Correx, emulsion, etc. 
    8. Be Cautious of Misleading Labels that appear to be approved by authorized third parties, e.g.:
    9. Avoid Relying on “Facts” that provide little or no evidence, e.g. some plastic products declare using recycled plastics in product packaging, without evidence on how many percents is actually recycled material. 
    10. Shun the Company, Brand or Product that tells totally fabricated claims or data.

     

    How should Companies Steer Clear of Greenwashing?

    1. Implement Lifecycle Analysis (LCA) and metrics based on impacts generated during procurement, transportation and disposal. With the true impact assessed from its entire lifecycle, the company can develop well-delivered sustainability programs based on LCA and measurable data to reduce the likelihood of messages being considered greenwash. 
    2. Improve traceability throughout the entire supply chain by establishing regulatory guidelines and selection criteria. For example, the company should be wary of the practices of its selected suppliers and partners, and also consider providing consumers with information that enables them to trace the various parties involved in the supply chain.
    3. Establish effective and interactive internal communication through cross-functional meetings among different departments and management levels to foster enthusiasm and align sustainability goals. Through internal communication, the company can avoid greenwashing that could result from discrepancies between what one department is communicating and another department is doing.
    4. Forge multi-company collaborations to raise industry standards, facilitate unified actions, and establish participating companies as drivers for improving sustainable practices.
    5. Initiate partnerships with the relevant NGOs to engage in a continuous dialogue, gaining a broader understanding of the issues being resolved.
    6. Be flexible in changing ethical approaches towards green sustainability with a clear focus on the message conveyed along with an appropriate engagement policy. 

     

    Conclusion

    Greenwashing has become more common in recent years, with more and more companies combining positive communication with poor environmental performance. Greenwashing can have a catastrophic impact on public confidence in green products and environmentally responsible companies, making the stakeholders reluctant to reward these businesses for actual sustainable achievements. This, in turn, increases the incentives for companies to engage in environmentally detrimental behaviour, which has been shown to create negative externalities and thus adversely affect social welfare. Therefore, all companies should steer clear of greenwashing practices by implementing actual effective sustainability policies in their day-to-day operations, to earn lasting trust from the consumers, as well as redefining the role of businesses in advancing towards a more sustainable environment. At the same time, as consumers, we should wisely utilise our collective power to steer companies towards more truthful and ethical products, by changing our habits and behaviours to support the more sustainable alternatives. 

    Writer: Cherrish Ng

    Reviewer: Vikky Beh

    Editor: Stella

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