Greenwashing Risk in Canada’s Sustainable Finance Market
As more money flows to ESG-labeled debt and equity, financial institutions are exposed to a higher risk of greenwashing through lending and investing in companies whose ESG credentials are materially inflated. In addition, the lack of generally accepted definitions and standards for sustainable finance products/assets coupled with unprecedented demands for ESG-aligned capital has made financial institutions vulnerable to greenwashing risk.
During the session, our speakers explored various types of greenwashing risk, drivers of greenwashing, and ways it can be minimized. Panelists were Amy West, Global Head of Sustainable Finance & Corporate Transitions at TD Securities, Halina von dem Hagen, EVP of Treasury & Capital Management at Manulife Financial, and Alexandria Fisher, Sustainable Finance Manager at GRI.
Key takeaways from this session included:
Manifestation of greenwashing risk in the wider economy: The rise of the sustainable finance market has changed issuers' demand for sustainability information. This requires a transition from qualitative corporate sustainability reports to ESG issues viewed as a source of material financial risk that must be disclosed using standardized metrics.
Limitations of ESG scores: ESG ratings are usually lagging indicators that reflect rating agencies’ methodology and subjective judgment. They do not represent the complete picture of the issuers or support cross-sector comparison.
The need to bridge the talent gap: Bridging the talent gap means hiring ESG talent, integrating knowledge, and upskilling existing employees and the board of directors. As international standards place higher requirements on the transparency and credibility of corporate sustainability disclosure, there will be related demand for skills and expertise in audit and compliance.
Regulations and standards related to greenwashing: The push for international standardization of ESG-related disclosure and financial product labeling is growing, and the need for alignment with international standards have never been higher. In Canada, the high levels of demand for ESG products, coupled with Canada’s principles-based approach to market regulation, have led to a dynamic and innovative sustainable finance market. Yet, Canada must continue aligning with international trends and minimizing greenwash exposure through more standardized guidance.
Anticipation of the evolution of greenwashing risk: Greenwashing is unlikely to disappear altogether but is anticipated to shrink in size and scale as the sustainable finance market continues to grow and mature in the near term. The field will be subject to more robust scrutiny as an increasing number of firms make ESG commitments (e.g., net-zero). Importantly, increasing regulatory requirements and expectations from capital providers and investors will accelerate the growth of the sustainable finance market in the coming decade.
This webinar builds on GRI's research paper How to Distinguish the Good from Greenwashing: Greenwashing Risk in the Canadian Market and Mitigation Measures for Financial Institutions - Global Risk Institute : Global Risk Institute and Mitigation Measures for Financial Institutions.
You can view Alexandria's slides here Greenwashing-Webinar-Slides-Alexandria-Ficher.pdf
Manger, Sustainable Finance, GRI
Halina von dem Hagen
Executive Vice President, Treasury and Capital Management, Manulife
Managing Director and Global Head of Sustainable Finance & Corporate Transitions, TD Securities