The finance world evolves and improves by finding the loopholes in the compliance and regulations frameworks, in fact all the major scams in the world occurred because of the loopholes the finance geeks found. There can be multiple reasons we can give for these failures but one is neglecting various issues while conducting the proper research while preparing the frameworks because what not to do is as important as what to do in this domain, nevertheless we can’t solely blame the policymakers because the finance field is ever evolving and time is very scarce, so with limited time we all have to get things done and it thus it also becomes the responsibility of the stakeholders to give feedback to the regulators.
Similarly, in the current scenario the sustainability boom in developing countries has caused the emergence of greenwashing behaviors that are impeding sustainable progress in the third world. Well, in this article we will get a deep understanding about greenwashing keeping in mind the Indian scenario and how stakeholders can be aware and fid out if the entities are doing greenwashing.
So, when the Indian regulator SEBI has made the sustainability compliances mandatory for the 1000 biggest listed companies in the form of Business Responsibility and Sustainability Reporting (BRSR) from FY23 and also asked mutual funds to take steps in ESG investing in order to facilitate balance between transparency, simplification and ease of doing business in an evolving domain, the firms have been trying to come on top by projecting false sustainability performances and of the method used by them is greenwashing.
As per Investopedia, “Greenwashing is the process of conveying a false impression or misleading information about how a company’s products are environmentally sound. Greenwashing involves making an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly or have a greater positive environmental impact than they actually do.”
Now, let’s understand how these firms do greenwashing, the most extensively technique used is in the form of advertisement, in fact according to one of the reports around 51.7% of company claims in India were greenwashed, and most of these (37.7%) were ambiguous.
The most important cause of greenwashing was that there were no specific laws and regulations relating to greenwashing and hence you could cheat and still not get caught, for instance Environmental organization Earth Island Institute filed a lawsuit against beverage giant Coca-Cola for falsely advertising that it is sustainable and environmental-friendly despite it being the largest plastic polluter in the world and yet coco-cola came out unharmed. This lack of regulation makes it difficult for consumers to differentiate between genuine and false environmental claims, and increases the risk of greenwashing.
To solve these inefficiencies, the market regulator SEBI came out with “green bond securites” Regulation 2(1)(q) of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’), defines “green debt security” as debt securities issued for the purpose of raising funds which are utilized specifically for renewable energy, clean transportation, sustainable water management, climate change adaptation, energy efficiency, sustainable waste management, sustainable waste management and biodiversity conservation projects and other similar objectives. However the guideline missed commenting upon the issue of ‘greenwashing’ which might not have increased investor confidence and which falls out of line with the green economy agenda of the current government.
However on 3rd February,2023 SEBI released a circular removing the doubts of investor relating to greenwashing thereby increasing their confidence, these circulars mentioned the do’s and don’ts that companies must keep in mind while issuing green bonds.
To address the concerns of market participants, regarding greenwashing, an issuer of green debt securities shall ensure the following to avoid its occurrence:
(i) While raising funds for transition towards a greener pathway, it shall continuously monitor to check whether the path undertaken towards more sustainable form of operations is resulting in reduction of the adverse environmental impact and contributing towards sustainable economy, as envisaged in the offer document.
(ii) It shall not utilize funds raised through green bonds for purposes that would not fall under the definition of ‘green debt security’ under the NCS Regulations.
(iii) In case any such instances mentioned in (ii) above come to light regarding the green debt securities already issued, it shall disclose the same to the investors and, if required, by majority of debenture holders, undertake early redemption of such debt securities.
(iv) It shall not use misleading labels, hide trade offs or cherry pick data from research to highlight green practices while obscuring others that are unfavorable in this behalf.
(v) It shall maintain highest standards associated with issue of green debt security while adhering to the rating assigned to it.
(vi) It shall quantify the negative externalities associated with utilization of the funds raised through green debt security.
(vii) It shall not make untrue claims giving false impression of certification by a third-party entity.
*the data is taken from SEBI circular.
Conclusion: The issue of greenwashing was solved in the very earlier stages, this will provide a great a great boost to investors confidence and a major step in sustainable investing.
Thank you everyone, we will meet again in the next article discussing another topic, till then any suggestions and queries will be highly appreciated.
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