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Where Compliance in Trade Finance Meets Greenwashing

Updated: Sep 15, 2021


As the demand for environmentally friendly and sustainable practices of big business has increased, so too has the need for businesses to promote themselves as philanthropic, ecologically aware, and socially responsible. Demand has increased with greater consumer understanding what with the evolution of communication technology. Sadly, as this transition has taken place, the temptation by companies to ‘distill’ their public profile – to appear to have grown a conscience - has also increased. So, how can innovations in trade finance combat this?

Public Relations

In an essay in 1986 (as outlined by Motavalli), a New York environmentalist called Jay Westervelt wrote an essay about hotels and their lack of any genuine effort to reduce energy wastage even though they were placing placards in rooms promoting the recycling of towels – indeed they weren’t. Their apparent ‘aim’ was to save the environment. What might easily have been cast aside as a once noble effort that had fallen into abeyance, actually turned out to be a concerted strategy by the hotels to generate profit. Where customers thought they were helping to save the planet – as immature a notion as it may have been in 1986 – they were actually the victims of calculated propaganda. The hotels were manipulating the perception of the consumer and Westervelt dubbed it ‘greenwashing’.

According to the Corporate Finance Institute, there are seven different types of greenwashing. Firstly, there is the surreptitious pay-off: this is where an environmental issue of primary concern is obscured by a lesser one. An example might be in hiding the deleterious effects of a product on the environment by emphasizing the environmentally friendly manufacturing process to make the product. Another type is to make public claims about how a product is environmentally friendly without providing any means for third parties to check the voracity of the statement. For example, a company might state that their product contains a given percentage of consumer-recycled constituents but provide zero proof, and do not provide any means by which a watchdog can verify their claim. Equally, organizations can employ deliberate strategies of vagueness in their advertising: to say something is all natural is misleading because any number of toxic substances occur naturally (such as arsenic or uranium say). Further still, a company may directly mislead their consumers by placing a fake label on a product, falsely certifying its green credentials. Then there is the strategy of promoting meaningless information. This is when a company exults in the fact that a product is free of a particular substance even though that substance has been heretofore banned anyway. More still, is making claims that a product is favorably environmental when it has no genuinely green attributes, such as stating that a brand of cigarettes is organic. Finally, there is lying: making a green statement about a product that isn’t true (and going some way to manipulating data and perception to back up the claim). There is more on this specific sin below.


Figure 1: Strategies organisations use to greenwash their public profile (Corporate Finance Institute).

Villains

In September 2015, the United States’ Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act to the Volkswagen Group (reported on by the New York Times). The EPA found that deliberate programming of turbocharged direct injection diesel engines had taken place so that emission-controlling technology only initiated when actual laboratory emissions testing was taking place. The upshot was that during said testing, the vehicles expelled nitrogen oxides at a level that met US standards but that when the vehicles were actually being driven in the real-world, they were emitting up to 40 times more. The software achieving this slight-of-hand was installed in around 11 million vehicles world-wide. Volkswagen then, had gone some way to making sure they were able to lie about how environmentally sound their vehicles were. The giant multinational automotive manufacturer is still subject to court proceedings across the world as these words are being written.

In 1997, British Petroleum (BP) started out on its greenwashing journey. The sector it belonged to at that time – energy and natural resources - had a climate change denial group, and BP decided to leave it. In short shrift it then acknowledged the link between climate change and fossil fuel use. Several years later, BP had retained the services of Ogilvy & Mathers to run a campaign to reinvent their brand, to the tune of $200 million. Where the company was institutionally known as British Petroleum, the company propounded the new slogan of ‘Beyond Petroleum’. Even colour schemes were reworked and BP adopted the more psychologically pleasing green, yellow, and white sunburst. The company even associated itself with green groups and bedecked its stations with ‘green’ images. More recently however, BP has receded from its greenwashing mission due to incidents such as the Deepwater Horizon oil spill. It seems to be an inescapable reality for the company that they will remain slaves to the nature of their business: that they generate their earnings from fossil fuels and fossil fuels are damaging the planet.

Beyond Greenwashing

As pointed out by Dr. Harding for the World Trade Symposium in January 2021, the UK will require large corporates to make mandatory climate-related disclosures by 2022. The EU has required it since March 2021, and Joe Biden has already made similar promises as he began his tenure in office. New Zealand has been ahead of all of these governing bodies for some time. Dr. Harding goes on to state that 78% of European businesses are currently below acceptable disclosure standards on their climate duty. Regulation then, is late and sorely needed.

Presently, the trend is to see sustainability through the lens of climate change and environmental issues only. Hence the weight greenwashing imposes on this article. But sustainability is also about other societal and humanitarian issues. Environmental criteria have risen to the fore perhaps because of the ease with which it is possible to assess green impacts. As a means by which to embrace the notion of doing the right thing, it makes sense to start there. Strides forward can only be made though, if other issues are addressed too, such as favorable working conditions, access to quality healthcare, detection of crime and protection against it, provision for education and employment opportunities, as well as access to housing and basic amenities. Regulation must also encompass these elements.

Where regulation can be seen as ‘pushing’ from those that govern, ‘pulling’ needs to begin from the financial sector. Without impetus from the world of finance, there is a danger that public relations campaigns will extend to other colours beyond the green in greenwashing. For sure, the battle against fraud and deceitful accounting is in full swing and has been for some time, but what colour could be used to refer to the methods that may evolve in the gap between full and right disclosure and criminality? In trade finance, these concerns should fall to the responsibility of compliance. Perhaps it is for compliance to evolve to the point where environmental, societal, and humanitarian questions, all come under its umbrella. In order for this kind of progression to be successful, banks and associated financial entities need to align globally and agree to a set of universal thresholds and benchmarks. If compliance measures of this ilk are robust, governments, regulatory bodies, and businesses themselves, can all operate in concert to raise social, environmental, and humanitarian bars for all.




Where Compliance in Trade Finance Meets Greenwashing
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