A checklist to find out if your wallet is guilty of greenwashing
1. Is the goal a real goal?
Bloomberg News analyzed over 100 bonds linked to issuers’ ESG credentials worth nearly $68 billion that were sold by global companies to investors in Europe and found that the majority were linked to climate goals. weak, irrelevant or even already achieved. Some companies have promised to do nothing more than maintain their existing ESG ratings.
2. Are the emission targets incomplete?
Environmentalists have developed ‘scope’ as a concept for breaking down and accounting for a company’s impact on climate change – and sometimes companies are just telling part of the story. According to international standards, Scope 1 emissions simply reflect emissions caused directly by a company’s own operations. Scope 2 represents carbon emissions from the production of goods purchased as part of a company’s operations, such as electricity or the cement it uses. The largest number often come from scope 3 emissions – those produced by companies in its supply chain or customers using its product, such as the carbon released when truckers burn diesel fuel. For an oil company, Scope 3 could include 90% of its total emissions. But in many cases, borrowers do not include Scope 3 emissions as a cost-of-borrowing target. Tesco Plc, for example, sold a bond related to its ESG efforts in 2021 that excluded scope 3 emissions and included its scope 1 and 2 emissions.
3. Are the S and G lenses forgotten or blurred?
Social and governance aspects have become just as crucial as corporate environmental efforts, especially since the #MeToo and Black Lives Matter movements began to impact consumer spending. Many companies use their annual sustainability reports to show how fair they are in employment or what they have done to improve employee well-being. Since some of these objectives are difficult to measure in areas where little data is available, there is a risk of overestimating the results. BlackRock Inc., for example, settled a discrimination lawsuit in July 2021. Ironically, the US company had months earlier linked its borrowing costs to targets that included the number of women in leadership positions and the number of Black, African American, Hispanic and Latino personnel it employs.
4. Sounds like ESG, but is it?
New debt structures have constantly appeared as the money invested in sustainable investing has increased. But in some of these formats, the link between the ESG label and ESG objectives has become tenuous. The so-called linked bond of Bank of China Ltd. sold in 2021 is linked to the performance of a pool of sustainability-related loans granted to its clients – i.e. to nothing that BOC does or does not do under ESG conditions, but to ESG performance customers who have taken out these loans. Nordea Bank Abp has priced a bond in September 2022 whose proceeds have been committed to its sustainability-linked lending business, saying it is “the first of its kind”. Many banks raise funds in the bond market and sometimes the proceeds are used to support lending businesses. So, does the Nordea deal count as ESG debt? Not as defined by International Capital Market Association and Global Lending Market Associations.
5. How flexible is too flexible?
Sustainability bonds and sustainability loans are signed with borrower commitments to achieve certain environmental or social goals, but these goals can be changed. More flexible agreements allow issuers to adjust these targets under certain conditions, without incurring a penalty. Issuers say they need to look for ways to deal with increasingly volatile markets in which key ESG metrics such as energy prices become harder to predict. Then there is “dormant” sustainability debt where the financing has an ESG label but no immediate sustainability objectives.
There are dozens of ESG rating and data providers around the world that can provide some assurance that companies are doing their part in sustainability and whether ESG debt is what they claim to be. All of this greenwashing detective work would be easier if investors and the public had a standardized approach and a solid set of data to compare against. Private rating systems can be unreliable and company reports are spotty and difficult to compare. The European Union has proposed a European standard on green bonds, which could be applied to other types of ethical debt such as issues related to sustainability or social finance, establishing a clear methodology and disclosure requirements for the ESG analysis or rating providers. The guideline, although voluntary, could encourage consistency in the disclosure of ESG measures. Financial organizations also regularly update the ESG principles of debt to follow market developments in order to avoid the risk of greenwashing. The global lending associations, for example, changed their sustainability-related lending principles in 2021 to mandate verification of ESG objectives by an independent arbitrator. Even with market guidelines and third-party reviewers, many still question whether companies disclose enough information to substantiate the ESG rating or claims they make.
7. Are the targets really relevant?
Companies have set ESG goals that they proudly announce or have taken on debt linked to certain ESG achievements. For example, some social housing providers promising to build more affordable developments or education service providers pledging to expand training internationally – even if this is their main business activity. Some said they aligned their goals with the United Nations Sustainable Development Goals and some said they followed a guided register of material performance indicators recommended by ICMA. However, it is difficult to judge the impact of an individual objective on the overall performance of the company in terms of sustainable development.
8. Are the objectives secret?
While many issuers are required by public debt market requirements to disclose their ESG objectives if they wish to link their funding to such objectives, the private nature of the lending market allows borrowers to hide their objectives from public view. audience. And there’s no requirement for borrowers to reveal loan terms, so there’s no way to know what effect their ESG efforts have had on the planet or how aggressive their goals were in the first place.
More stories like this are available at bloomberg.com