Jarrod McAdoo, Director of Sustainable Procurement Solutions at Ivalua
There has been a sharp increase in public interest for Environmental Social and Governmental (ESG) issues, with ESG considerations playing a critical role in consumer choices. As a result, Financial Services (FS) firms have started to place greater focus on ESG initiatives.
However, research from Ivalua has found that 55% of FS organisations are concerned that they could be at risk of unintentional greenwashing – the highest percentage of all sectors surveyed. These concerns are understandable: greenwashing cases have seen a meteoric rise over the last few years, especially in the FS industry. In 2023 alone, there was a 70% jump in greenwashing incidents in the banking sector.
To combat the rise in greenwashing, ESG regulations are on the rise and the microscope is on financial services to ensure all green claims are legitimate.
Pressures from regulations
As pressures rise to meet regulatory standards, organisations are challenged to adopt more robust reporting mechanisms and align their operations with genuine ecological goals. For most organisations, this includes reliable Scope 3 data within the value chain.
One regulation pressurising financial services to combat greenwashing is the UK government considering the inclusion of Scope 3 disclosure within the Streamlined Energy and Carbon Reporting (SECR) framework. The SECR framework will force financial services to manage Scope 3 reporting proactively and substantiate green claims with verifiable data.
Scope 3 encompasses emissions that are produced indirectly within the organisation’s value chain. These emissions are the most difficult to report on as they are not directly associated with a company, but rather indirectly through supplier activity. So, gathering the information needed to report on them can be complex for organisations like banks.
Additionally, in the background of the existing regulatory scene, financial institutions are preparing for the EU’s Corporate Sustainability Reporting Directive (CSRD). Despite its recent two-year delay, organisations are already preparing so they can meet its requirements ahead of its implementation. The CSRD requires organisations to disclose ESG matters, increasing corporate transparency and Scope 3 responsibility.
Finally, the FCA’s ‘Guidance on the anti-greenwashing rule’ helps to ensure sustainability-related claims made by authorised firms about their products and services are fair, clear, and not misleading. From May 2024, the FCA can challenge firms that they consider to be making misleading claims and take appropriate further action.
The origins of greenwashing: Scope 3 emissions and financial services
For financial services organisations, one of the biggest causes of unintentional greenwashing is the lack of visibility into suppliers’ environmental impact. For example, organisations may be unaware of the negative impacts of the Scope 3 emissions of their suppliers. If financial organisations don’t have good visibility, how are they to know the environmental impact of their suppliers? This is precisely where allegations of greenwashing can arise.
The management of supply chains, and the collection of Scope 3 data, is high up on the list of challenges and priorities facing financial organisations when attempting to drive company-wide ESG change. Ivalua research reveals that while 47% of financial services organisations are ‘very confident’ that they can accurately report on their Scope 3 emissions in their supply chain, over three-quarters (69%) say Scope 3 measurement is a ‘best guess’. While this is an estimated measurement, this data can help organisations to determine climate impact.
Building credible sustainability programmes
To build trust and credibility in sustainability programmes, financial services need to find ways to best measure and gauge the impact of their Scope 3 emissions. Since absolute accuracy can be hard to achieve, financial services organisations shouldn’t spend time and money fixating on 100% accuracy as their starting point. Instead, organisations need to equip internal procurement teams and the wider business with good data and insights which can contribute to building realistic and actionable net zero plans.
Clearing the green haze
With regulators clamping down on greenwashing, and pressures from consumers on the rise, it is more important than ever that FS organisations have granular visibility into their supply chains.
Nearly three-quarters (72%) of financial services organisations agree that with regulation on the rise and business reputation at risk, the cost of not acting will far outweigh the cost of investing in green initiatives. Implementing initiatives to tackle greenwashing in finance can create a level playing field where firms whose products and services genuinely represent a more sustainable choice can thrive. By adopting a smarter approach to procurement, organisations can benefit from greater visibility into their supplier base, work to identify high-emitting suppliers, and take steps to collaborate on improvement plans. This will empower procurement teams to start taking action immediately, identifying unsustainable suppliers and ensure the business is heading in a greener direction.