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The EU’s top banking authority says it may recommend regulatory changes to tackle greenwashing by lenders, raising the alarm over financial institutions’ backing of fossil fuel companies, mining operations and companies linked to deforestation. 

Following a call for evidence launched in November last year, the European Banking Authority (EBA) says there is “a clear increase in the total number of potential cases of greenwashing across all sectors, including for EU banks”. 

The regulator says in 2022, 60% of alleged cases of greenwashing – defined as when sustainability-related communications do not fairly reflect the underlying reality – were against companies located in North America and the EU. 

Nearly a fifth of allegations worldwide were in the financial sector, it adds in a progress report published in early June. Last year, more than 200 such cases were reported in the EU alone, compared to just 40 in 2018. 

The EBA says it will issue a further report in May next year containing final recommendations, “including on possible changes to the EU regulatory framework”. 

The report identifies several specific examples of potential greenwashing by banks. 

The most common allegations against EU lenders relate to business strategy, such as misleading the public into believing a bank is fighting climate change “while investing in a company allegedly linked to deforestation in the Amazon” or “provid[ing] financing to oil companies operating in the Arctic”. 

In some cases, public statements to decarbonise investments are not underpinned by a credible transition plan. This could include committing to step away from coal-related activities but continuing to finance the wider fossil fuel sector. 

The EBA also highlights sustainability-linked loans that are presented as having a real-world impact but in fact have weak structures or contractual commitments, for instance if a borrower receives a discount if they hit targets but face no penalty if they do not. 

In other cases, allegations focus on banks making unsubstantiated claims such as “potentially avoided emissions”, or on making commitments that may not be realistic, such as reducing exposure to scope three emissions by borrowers in the energy sector. 

 

Risk and regulation 

Greenwashing presents a growing risk to banks, inventors and consumers, the report finds. 

The top risks to lenders are reputational damage and potential litigation, it says. Liquidity and funding risks could arise if investors lose confidence in a funder’s sustainability credentials, while litigation against counterparties could weaken their financial position and present a credit risk. 

The extent to which these risks are material is “currently perceived to be low or medium for banks, and medium or high for investment firms, but is expected to increase in the future”, the EBA adds. 

The report finds that some existing and incoming EU regulation – including rules on unfair marketing, due diligence and climate-related disclosures – could help tackle the growth of greenwashing.  

However, challenges include finding adequate data and methodologies to properly implement those controls. 

In deciding whether to recommend further regulatory reforms, the EBA says it will consider industry feedback, noting that financial institutions generally consider that existing controls are “rich” and stability is essential. 

The financial sector tends “to caution against additional regulatory initiatives which could increase complexity, in particular if focused on the financial sector while greenwashing is not inherent solely to financial services”, it says. 

The EBA’s warning comes as non-government organisations escalate action against lenders accused of greenwashing.  

In February this year, a group of campaigners filed a first-of-its-kind lawsuit against BNP Paribas for its financing of fossil fuels, and in April, researchers found just five North American banks had provided nearly US$200bn in financing for fossil fuel activities despite each pledging to reach net zero emissions by 2050. 

However, Rebecca Harding, an independent trade expert with boutique consulting firm Rebeccanomics, says there is a risk that trade finance banks are becoming overwhelmed with different frameworks and guidelines – paradoxically undermining their ability to provide sustainable lending facilities. 

“There are a plethora of standards and regulations, and that is just muddying the waters,” she tells GTR. “It increases the probability of this turning into a know-your-customer exercise.” 

Harding says it is hugely onerous for an institution to gather detailed information across an entire supply chain, which could result in banks cutting financing more broadly and causing indirect damage to economies in need of support. 

“We need to think about how we manage the transition, rather than just shutting off things like fossil fuels that might create livelihoods in the emerging world,” she says. 

“It is probably relatively easy to do this with large-scale, long-term project financing, structured finance-type deals. The key thing for trade finance is it’s much more difficult to do on a short-term, high-frequency basis.”