The Challenge of Greenwashing

Danmarks Nationalbank has issued a paper ‘Corporate CO2 communication is Not Associated with Fewer Emissions’ 1. In the paper, annual reports of 141 large European companies were analysed to compare their communications about CO2 equivalent emissions with past, present and future developments in emissions. There was no clear statistical correlation over the period 2013-19.

In this context, The EU’s Sustainable Finance Disclosure Regulation (SFDR) came into effect in March 2021 and is already requiring asset managers to disclose the credentials behind any investment products labelled as sustainable.

The UK’s Financial Conduct Authority (FCA) is also unhappy about the prevalence of greenwashing. In response it has brought forward measures to manage the use of terms such as ‘ESG’, ‘green’ and ‘sustainable’. Although such rules apply to financial products and organisations, it is indicative of the scale and the seriousness of the misuse of these terms that they are necessary.

Evidence of the need for such measures is easy to find in media reports. For example, while in May Deutsche Bank introduced a requirement that its suppliers undertake a vendor sustainability rating from EcoVadis, or another eligible rating agency, in June the CEO of Deutsche Bank subsidiary DWS resigned over claims that DWS had aggerated the sustainable credentials of some of its financial products. A few weeks earlier the US Securities and Exchange Commission fined BNY Mellon $1.5 million for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds that it managed.

The context for this latest FCA proposal is shown by a recent Boston Consulting Group (BCG) report 2 that found Environment, Social and Governance (ESG) related products could generate substantial revenues for retail banks. 75% of retail banks were found to be increasing their spend on ESG initiatives by 20%. The author said, ‘sustainability has moved up the priority list for all stakeholders, making it the next frontier of competitive advantage for retail banks and a pillar for future growth.’

Challenge of metrics

At a recent session at the Sibos conference, the sheer complexity of measuring ESG was discussed. If environmental metrics are hard, the social and governance metrics are equally challenging. Whether it is sensible or even possible to award a ‘score’ for ESG was questioned, yet increasingly there is a regulatory requirement to do just that.

One of the speakers, Adrian Whelan, Global Head of Regulatory Intelligence at Brown Brothers Harriman, made two interesting comments.

First, ‘everybody has to be doing something, either by law, regulation or for commercial purposes. If you don’t have a coherent ESG strategy, that becomes your story.’ And second, ‘the other thing about ESG is that it isn’t, it can’t and won’t be the same on a regional or geographic basis. ESG can’t be the same in India as it is in the UK or the Nordics or the US because the economies are built differently. The political environments are also very different. Standardised approaches to ESG are just not the way the world works.’

Different geographic priorities

JP Morgan, in a recent report on five major payment trends 3, agreed. It gave the example of Europe, where the ‘E’ of ESG is seen as the most important, US firms focusing more on social factors, like diversity, equity, and inclusion, and in Asia Pacific China has a Net Zero 2060 target. In Singapore and Hong Kong ESG disclosures for listed companies are becoming common.

Within a region there are often different priorities. For example, Malaysia and Indonesia’s environmental concerns focus on rainforest preservation and palm oil. In Australia mining, water and energy resources are the priority.

There remains a lack of corporate disclosure on sustainability. As a result, financial firms are turning to data providers to fill the gap. This creates a challenge because of inconsistent data between vendors.

Research by Alveo, a cloud-based data management provider, found that 74% of buy-side firms, companies that provide advice on buying stocks and securities for use within their own organisations such as mutual funds, pension funds and hedge funds, rely on external ESG rating services for the bulk of their data. 57% use third party experts for information such as carbon emissions.

However, with different regulatory requirements in the US, UK and elsewhere, there is concern about a possible lack of international harmony in terms of the requirements facing firms.

Objections to ESG reporting

McKinsey have written about whether companies really care about ESG4 and have listed four objections to ESG.

1. ESG is not desirable, because it is a distraction. 

The logic here is that businesses exist to make money while meeting the rules and regulations laid down by society. It is, therefore, ‘good for the brand’ rather than being a core strategic requirement.

2. ESG is not feasible because it is intrinsically too difficult. 

The argument is that meeting the technical requirements of each of the E, S and G components is too hard. How do you meet the diverse expectations of stakeholders for each component?

3. ESG is not measurable, at least to any practicable degree.

How can you measure each component of ESG, particularly the S and the G to an auditable, comparable level? How do you weight them in terms of importance? While credit scores of S&P and Moody’s correlated at 99%, ESG scores across six of the most prominent ESG ratings and scores providers correlate on average by only 54% and range from 38% to 71%. 

Organisations such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) can measure the same phenomena differently; for example, GRI considers employee training, in part, by amounts invested in training, while SASB measures by training hours. The result is that different ratings and scores providers provide diverging scores.

4. Even when ESG can be measured, there is no meaningful relationship with financial performance.

Final word

Rather than decide that ESG is too hard, perhaps the solution is to focus on the environment in the context of the cash industry. Given the shared goal of issue departments of central banks, it should be possible to agree useful goals, metrics and methodologies to use in benchmarking operations and performance.

1 - NEWS_No. 2_Corporate CO2 communication is not associated with fewer emissions.pdf (

2 - Global Retail Banking 2022: Sense and Sustainability

3 - Five Key Payment Trends to Watch in 2022 | J.P. Morgan (

4 - ESG is essential for companies to maintain their social license | McKinsey