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Greenwashing in finance: let's dare to finance the transition!  - Cyber ​​& Climate > Risks

Greenwashing in finance: let’s dare to finance the transition! – Cyber ​​& Climate > Risks

On June 1, the boss of DWS, Asoka Woehrmann, resigned from his post: a decision which follows a search by the German police of the premises of this subsidiary of Deutsche Bank for suspicion of greenwashing. DWS is indeed suspected of having lied about the “ESG” classification of some of its funds.

In the viewfinder of the BaFin (financial regulator in Germany), DWS is also the subject of an investigation by the Securities and Exchange Commission (SEC), the American federal regulatory and supervisory body. financial markets, which has attacked several large banks in recent months: BNY Mellon for inaccurate information on ESG criteria, Goldman Sachs Asset Management on compliance with ESG criteria… In France, the Financial Markets Authority (AMF) announced in its 2022 roadmap that it wanted to achieve checks with sustainable finance players to verify the consistency between contractual commitments and the investments made, as well as the associated control system. Greenwashing in finance will not go unpunished for long.

Risk rather than impact

It must be said that the previous years have seen the emergence of everything and anything in terms of green finance. A Greenpeace studypublished in June 2021, pointed out the mismatch between investments qualified as sustainable and their real impact on the climate crisis. “Financial institutions are more interested in the risk induced by climate change than in the impacts of financed companies on climate change”explains Peter Haberstich, campaign manager at Greenpeace Switzerland.

Read also: How to initiate a green finance strategy?

He also notes another problem: the lack of ambition of financial institutions with regard to environmental issues. “If a business is a bit more sustainable than another then it is considered sustainable. This is how you end up with airlines in the portfolios”he remarks, emphasizing thatan activity should only be qualified as sustainable if it is aligned with the Paris agreementsthat is, limiting the temperature increase to 1.5 degrees Celsius above pre-industrial levels.

“Investors should be asking questions about what is planned in the long term to achieve this goal of the Paris agreements but they are not. They are only interested in risk and return”, sorry Peter Haberstich. He is joined on this point by Pauline Becquey, Managing Director of Finance for Tomorrow, branch of Paris Europlace which is dedicated to sustainable finance: Impact indicators should not be restricted to good risk management but reflect the intentionality of the company. If it’s not there, there’s really no impact.” she points out.

She gives the example of a company that boasts of creating jobs without being interested in the nature of its jobs: were they created in a region where the problem of unemployment is significant, for example? “It is not a question of attributing a positive impact after the fact but of defining an objective upstream and implementing a strategy to achieve it”, says Pauline Becquey. Finance For Tomorrow also launched a working group on impact finance in March 2021, from which a definition emerged that highlights the importance of both intentionality and measurement.

Additional cost vs profitability

Julien Lefournier, co-author of The illusion of green finance (Editions de l’Atelier), for its part, estimates true green finance at only 1% of assets. Speaking on June 14, 2022 as part of the Shift Project’s ClimatSup Business project, which aims to train the economic actors of tomorrow in planetary physical limits, he insisted on themismatch between the search for profitability of financial markets and the tangible cost of ecological transformation (what he calls “the green premium”). In other words, investing to transform our economy so that it responds to the Paris agreements is not profitable and therefore cannot be of interest to investors. “The market is looking for the lowest risk and is short-termist while the transition is risky and takes place over the long term”he adds.

Read also: Daf-banker relationship: calm in sight before a rate hike

Alexandre Poidatz, “Finance and climate” advocacy officer at Oxfam France, quotes a study carried out by his organization on this subject of the “green bonus”: if, in 2018, the share of profits paid to shareholders had been limited to 30%, the money generated would have made it possible to cover 98% of the investment needs in the transition of CAC 40 companies. “There are different choices to be made”, he judges. If investors took a little of their share of this additional cost linked to the ecological transition, instead of maximizing profits, the economy could really be transformed.

Not so green bonds

Julien Lefournier points out the green bonds that only have green in the name: “Green financing is only possible for me on two conditions: it finances green underlyings and investors pay the additional cost of the ecological transition. But even if they finance sustainable projects, green bonds do not accelerate the transition because the financiers do not take their part: these projects would have taken place anyway”, he considers. For him, it is not enough to agree to finance a sustainable project but to offer a price that takes into account the additional cost, the famous “green bonus”.

And sustainability linked bondsthese bonds whose rate varies according to the achievement of previously set sustainable objectives? The projects financed by these products are not necessarily green since the KPIs are set by the issuers themselves and often don’t make sense, as remarked Reclaim Finance », he points out. SRI funds do not find favor in his eyes either, agreeing on this point with the Greenpeace study on the preference of risks to impacts.

Julien Lefournier also points out that it is not true that investors are committed to more sustainability, thereby forcing the managers of financed companies to take a more sustainable turn. In this regard, he quotes Orpea which, after the recent scandal, continues to benefit from the support of investors, even if certain ESG funds have sold their shares.

The role of Daf: measure and prioritize

Faced with these drifts where green finance is only marketing, are there solutions? For Julien Lefournier, many things can be done at the regulatory level, such as subsidizing green yields and penalizing brown, in order to finance this “green premium”. Above all, he thinks that the financial world must consider human and natural capital in the same way as financial capital. On this point, he agrees with the defenders of environmental accounting.

A change which will surely take time to take hold of financial institutions but which can already become a reality within the financial departments of companies: they have the cards in hand to fight against greenwashing within their company by implementing truly sustainable actions, and by not reducing ESG to communication.

They can first of all help to calculate the carbon footprint which is, according to Peter Haberstich, the first step for companies that really want to embark on a sustainable approach, provided that they include scopes 1, 2 and 3, which is very little done. And why not link part of the remuneration of investors and managers to this carbon footprint?

Provided that it is significant: Alexandre Poidatz recalls that an Oxfam study published in April 2021 reported that only thirteen CAC 40 companies indexed part of their CEO’s compensation to a dedicated climate objective (such as the reduction of CO2 emissions) but that these objectives represented on average barely more than 3.5% of their remuneration… For Pauline Becquey, beyond the carbon footprint, it is a question of managing all the significant negative impacts of her company. “The SFDR regulations indeed require the publication of these negative impact indicators such as greenhouse gas emissions, the energy mix from non-renewable sources, waste management, etc.”.

The Daf can not only calculate these indicators but also prioritize projects aimed at reducing them. “In what the Daf knows how to do, it is the technicality that it can bring to people who don’t come from the investment world to arbitrate between different projects in terms of “CSR profitability” based on figures and not convictions”, thinks Grégoire Chevignard, Daf of Eris. By asking the right questions, he can identify truly CSR projects and those that are only cosmetic.

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