From UPSC perspective, the following things are important :
Prelims level : Greenwashing
Mains level : Not Much
Reserve Bank Deputy Governor called for a taxonomy on green finance to avoid the risk of “greenwashing”.
What is ‘Greenwashing’?
- Greenwashing refers to misleading the general public into believing that companies, sovereigns or civic administrators are doing more for the environment than they actually are.
- This may involve making a product or policy seem more environmentally friendly or less damaging than it is in reality.
- The term was coined by environmentalist Jay Westerveld in 1986.
- The phenomenon came into practice as consumers and regulators increasingly sought to explore planet-friendly, recyclable and sustainable ‘green’ products.
- By 2015, 66% of consumers were willing to shell out more for a product that was environmentally sustainable.
How is it done?
- There is the indiscriminate use of the terms ‘net-zero’, ‘net-zero aligned’, ‘eco-friendly’, ‘green’ and ‘ecological’.
- Since there is no compliance mechanism, such practices are rampant.
Why does greenwashing happen?
- Greenwashing is done primarily for a company to either present itself as an ‘environment-friendly’ entity or for profit maximisation.
- It is achieved by introducing a product, catering to the inherent demand for environment-friendly products.
- In certain instances, it is done using the larger idea as a premise to cut down on certain operational logistics and providing consumer essentials.
What does it have to do with the financial sector?
- Ethical investing: Sustainable investing has become increasingly popular among millennials and impact investors concerned with ‘ethical investing’.
- Role of ESG credentials: Financial services providers expect increased scrutiny of a company’s Environmental, Social and Governance (ESG) credentials from regulators, shareholders, customers as well as other stakeholders.
- Transition funding: Financial institutions are expected to fund the transition towards renewable energy and discourage investments in further harnessing of conventional energy sources as coal, oil and gas.
Policy moves in India
- If the financial sector is to respond effectively to the demand for products that endeavour to introduce positive changes into the economy, it is imperative that ‘greenwashing’ is averted.
- In May this year, market regulator Securities and Exchange Board of India (SEBI) constituted an advisory committee to look into all ESG-related matters.
- The expert committee recommends that financial institutions immediately discontinue all lending, underwriting and investments in companies wanting to strengthen or expand their coal-related infrastructure.
- As for oil and gas, it recommends the discontinuation of all investments that would involve exploration of new oil and gas fields, expansion of existing reserves and further production.
- Instead, companies should facilitate increased investment in renewable energy and institutions that are aligned to facilitate net zero emissions by 2050.
- Companies must work towards reducing emissions across their entire value chain and not limit the endeavor to only one part of the chain.
- They must not invest, through any means, in harnessing fossil fuels or engage in deforestation and other environmentally destructive activities.
- In addition to this, companies cannot compensate for this investment by means of cheap credits, that “often lack integrity”.
- Further, all state and non-state actors must ensure a ‘just transition’ such that livelihoods are not affected.
- The committee also recommends a transition from voluntary disclosures (pertaining to net emissions) to regulatory norms.