Greenwashing happens when organizations promote environmental credentials for their products and services that are materially inflated or even in contradiction to their performance. Financial institutions are exposed to this risk through lending and investing to these companies, and through the design of environmental, social and governance (ESG) or sustainability-labelled financial products.
Canada is the fastest-growing market for sustainable finance products globally. The high levels of relatively new investor demand for ESG products, coupled with Canada’s principles-based approach to market regulation, have led to a dynamic and innovative sustainable finance market on the upside. Subsequently, greenwashing risk is also on the rise.
This paper examines the conditions and factors driving greenwashing and risks facing financial institutions arising from this growing phenomenon, covers the primary types of greenwashing and recommends methods and indicators to identify and help minimize exposure to greenwashing risk, as well as actions to reduce the amount of greenwashing present in the Canadian market.