The European and American authorities are preparing to monitor the way in which ESG (Environmental, Social and Governance) criteria are applied by the financial sector. In particular, they fear the risk of greenwashing, i.e. a façade of greening finance without any real impact on the energy transition. The ECB in particular is warning of the risks and pitfalls of green finance, which is supposed to facilitate this transition.
An underestimation of the energy transition risk
In its report on climate-related risks to financial stability, the ECB examined the "greenium", a premium granted to companies issuing a green bond, enabling them to benefit from better financing conditions than a conventional bond. While this argument is increasingly being put forward as a reason to invest in green bonds, the institution points out that only bonds subject to an internal review can present a greenium. The absence of a framework in this area, and the varying requirements on the use of funds, open the door to exaggerations about the environmental benefits of projects.
This could lead to " an underestimation of transition risk and a massive sell-off in green bonds ", says the central bank.
Another point raised was the lack of labels. In its study, the ECB reveals that only 20% of ESG funds are recognized as such by the three main agencies specializing in this field.
Robert Ophèle, Chairman of the Autorité des marchés financiers (AMF), recently insisted on the need to " be able to rely on a corpus of minimum standards " established at European level to " avoid greenwashing, which would be very disastrous in every respect ".
Tightening regulatory standards on greenwashing
Faced with the threat of greenwashing, the SEC (Security and exchange commission) is preparing new standards for data to be disclosed by investment funds whose names include terms such as "sustainable", "ESG" or "low carbon". The aim is to force companies to disclose how ESG criteria are integrated into their investment policies. Meanwhile, the SEC is stepping up its warnings to the financial sector. On May 23, the regulator fined BNW Mellon $1.5 million for misrepresenting the ESG criteria of its investments to clients.
For its part, the ECB questions the veracity of companies' communication on their climate policies, considering that their CO2 reduction targets or their alignment with the Paris Agreement are sometimes difficult to assess. The central bank calls for a framework and standardization of green standards.
The implementation of consistent standards for sustainable financial instruments now seems unavoidable for both American and European authorities.