Financial institutions are increasingly prioritising sustainability, by setting ambitious CO2 reduction targets, adopting green initiatives and aligning business strategies with global climate goals among others. Many institutions are committed to achieving net-zero emissions of their own operations. But despite these efforts, there is an inherent risk of greenwashing.
Greenwashing is a term used to describe the practice where companies and organisations present themselves as more environmentally friendly than they actually are. Due to misleading claims, vague language or a lack of knowledge, stakeholders are intentionally, or unintentionally, misled. For example, the public may perceive it as contradictory when financial institutions commit to net-zero emissions but are not able to present clear decarbonisation strategies for their own operations. Even well-meaning initiatives can result in greenwashing if they’re not communicated in a clear, credible and transparent way. This could potentially result in lawsuits, reputational damage, a decrease in stakeholder trust and financial losses.
With CSRD, financial institutions are required to demonstrate compliance in their reports. These reports must not only contain sustainability outcomes, but should also communicate how strategies, actions, metrics and policies align with stated commitments. There are two key challenges that financial institutions face when reporting on sustainability commitments of their own operations:
Challenge one: reporting on Scope 3 emissions
In financial institutions’ annual reports, CO2 emissions should be categorised into three separate scopes, according to the Greenhouse Gas (GHG) Protocol. While Scope 1 and 2 emissions are straightforward and easy to compare (Scope 1 and 2 contains direct and indirect emissions from operations including own use of fossil fuels and power consumed by own operations), Scope 3 is more complex. The main reason for this is that data availability, data quality and data maturity is lower than for Scope 1 and Scope 2 emissions. Scope 3 also includes a wide range of different categories, including indirect emissions from the value chain, such as purchased goods, employee travel and financed emissions. Because not all financial institutions include the same GHG Scope 3 categories in their calculations, it’s difficult to compare results. But more importantly, financial institutions might be understating the GHG Scope 3 emissions when not all relevant categories are included.
This inconsistency stems from variations in methodology, data availability and reporting standards. Additionally, the lack of clarity can increase the risk of unintentional greenwashing and erodes trust.
To improve comparability and avoid greenwashing, financial institutions should provide clearer details on their reporting methods and adopt standardised guidelines for Scope 3 emissions, and how and when they will add additional Scope 3 categories into their calculations. This requires taking steps to assess data maturity and improve data lineage for future Scope 3 categories to be included. This would allow for more consistent and transparent comparisons across institutions which is fundamental to better inform external stakeholders and to internally steer and monitor the progress on Scope 3 emissions commitments.
Challenge two: using carbon offsetting
One potential approach for meeting net-zero commitments is through carbon offsetting, a strategy increasingly used by many organisations. Offsetting typically involves investing in projects that reduce or capture emissions elsewhere, such as reforestation, or carbon capture initiatives. While offsetting can play a role in meeting net-zero commitments for an institution’s own operations, it’s essential to apply this tool carefully and responsibly to maintain effectiveness and credibility.
Not all offsetting projects are equally reliable or impactful and some may fail to deliver the promised environmental benefits. As this can lead to greenwashing, financial institutions should be diligent in selecting high-quality offset projects that are verifiable, additional (i.e., projects that wouldn’t happen without the funding), and permanent in their emissions reduction. It’s equally important for institutions to clearly define what qualifies as carbon offsetting within their sustainability strategies. Transparency in how offsets are accounted for, the criteria used to select projects and their alignment with broader sustainability goals are essential. And carbon offsetting should complement – not replace – efforts to reduce emissions at the source, such as improving energy efficiency or transitioning to renewable energy.
Rounding up
Unintentional greenwashing poses serious reputational and legal risks to financial institutions. Here we have focused on just two greenwashing risks – reporting on scope 3 emissions and using carbon offsetting – but there are there other challenges where financial institutions run the risk of greenwashing, such as reporting on nature conservation and biodiversity commitments.
To manage these risks Valcon advises financial institutions to adopt a comprehensive, data-driven and transparent approach to sustainability target setting and reporting. This will help institutions comply with regulations, enhance trust with stakeholders, monitor progress on their sustainability commitments and seize new market opportunities in green finance.
The original Net Zero goal of 2050 is only 25 years away. Financial institutions should be pulling out all the stops to meet their sustainability targets, but doing so in as considered, meaningful and transparent way as possible. Greenwashing brings the industry into disrepute and can reinforce negative sentiment about the climate and risks to the planet, so the more credible the approach, the better it is for everyone.
How Valcon can help
Valcon can help with setting effective CO2 strategies, improving internal sustainability operations, data maturity assessments and resolving data lineage problems. Additionally, Valcon’s benchmarking study for Dutch banks provides valuable insights into best practices, guiding institutions in refining their sustainability strategies and achieving long-term success.
Curious about how Valcon can support your business on this sustainability journey? Reach out to Jeffrey today at [email protected].
Further reading:
How we enabled the green transition through turnkey sourcing at Energinet
Applying the Nature Target Setting Framework for asset owners and managers
Delivering the climate change programme for a UK high street bank
