To avoid the risk of “greenwashing,” the Reserve Bank’s Deputy Governor has called for a taxonomy on green finance.
Greenwashing is the practice of misleading the general public into believing that businesses, governments, or civic officials are doing more for the environment than they actually are.
This may entail making a product or policy appear more environmentally friendly or less harmful than it is.
Jay Westerveld, an environmentalist, coined the term in 1986.
The phenomenon emerged as consumers and regulators sought out more environmentally friendly, recyclable, and long-lasting ‘green’ products.
By 2015, 66% of consumers were willing to pay more for an environmentally sustainable product.
How is it done?
The terms ‘net-zero,’ ‘net-zero aligned,’ ‘eco-friendly,’ ‘green,’ and ‘ecological’ are used interchangeably.
Such practices are common because there is no enforcement mechanism.
Why it happens
Greenwashing is done primarily for a company to present itself as an ‘environmentally friendly’ entity or to maximize profits.
It is accomplished by introducing a product that addresses the inherent demand for environmentally friendly products.
In some cases, it is done with the larger idea as a premise to reduce certain operational logistics and provide consumer essentials.
Its relation with the financial sector
Ethical investing: Millennials and impact investors concerned with ‘ethical investing’ are increasingly interested in sustainable investing.
ESG credentials’ role: Regulators, shareholders, customers, and other stakeholders are expected to scrutinize a company’s Environmental, Social, and Governance (ESG) credentials more closely.
Transition funding: Financial institutions are expected to fund the transition to renewable energy while discouraging investments in traditional energy sources such as coal, oil, and gas.
Policy moves in India
If the financial sector is to effectively respond to the demand for products that aim to bring about positive changes in the economy, ‘greenwashing’ must be avoided.
The Securities and Exchange Board of India (SEBI) established an advisory committee in May this year to investigate all ESG-related issues.
Key recommendations
The expert committee recommends that financial institutions cease all lending, underwriting, and investments in companies seeking to strengthen or expand their coal-related infrastructure immediately.
In the case of oil and gas, it recommends that all investments involving the exploration of new oil and gas fields, the expansion of existing reserves, and further production be halted.
Companies should instead encourage increased investment in renewable energy and institutions that are committed to achieving net zero emissions by 2050.
Way ahead
Companies must work to reduce emissions across their entire value chain rather than focusing on just one part of the chain.
They must not, under any circumstances, invest in the extraction of fossil fuels or engage in deforestation or other environmentally destructive activities.
In addition to this, companies cannot compensate for this investment by means of cheap credits, that “often lack integrity”.
Furthermore, all state and non-state actors must ensure a “just transition” that does not jeopardize livelihoods.
The committee also suggests a shift from voluntary disclosures (of net emissions) to regulatory standards.