Montréal, October 2, 2024 – The Centre québécois du droit de l’environnement (CQDE) today released its report entitled Greenwashing in the financial sector: time for transparency and accountability. This groundbreaking report highlights the growing risks of greenwashing in the financial sector in Québec and the rest of Canada and makes 26 concrete recommendations to improve the transparency and environmental responsibility of financial institutions and governments.
In recent years, the sustainable finance and socially responsible investment (SFSRI) sector has grown exponentially, driven by increased investor demand for a commitment to a sustainable future, and by new regulatory requirements reflecting the same trend.
The scale of financial greenwashing
This proliferation of “green,” “sustainable,” and “responsible” financial products, such as ESG investment funds, is supported by a proliferation of false, misleading, or insufficiently substantiated environmental claims – in other words, greenwashing. Similarly, a number of entities active in the financial sector, including banks and listed companies, have begun to boast of their good environmental performance, without however ensuring alignment between their words and the impact of their activities. For example,
- a study has revealed that only 5% of the 250 largest investment funds presented as socially responsible are actually aligned with the objectives of the Paris Agreement.
- Similarly, more than 40% of the climate risk information provided by listed companies in Canada was assessed as “generic, vague, or incomplete” in 2021.
“The finance sector has an essential role to play in the fight against climate change. We hope that this research report will help guide those involved in sustainable finance to become part of the solution and a major ally, rather than exacerbating the problem by enabling or even condoning greenwashing practices,” concludes Geneviève Paul, Executive Director of the CQDE.
Financial greenwashing harms investors and the environment alike
The report points out that greenwashing not only harms investors, who are misled in their decisions, but also weakens environmental protection, delaying the allocation of capital to transition-oriented projects that are truly sustainable.
Moreover, financial greenwashing undermines public trust in the green initiatives of financial institutions. A full 70% of retail investors in Canada do not sufficiently understand what responsible investment entails. To remedy this, the CQDE advocates greater public awareness of sustainability issues and increased training requirements for financial advisors.
“It’s often difficult for investors to find their way around sustainable or responsible investment. How can we ensure that our investments will really have the desired spin-offs and won’t contribute to worsening the environmental crisis?” asks Julien Beaulieu, an affiliated lawyer and researcher for the CQDE and lead author of the report.
A legal framework to meet the challenges
Although current legislation already prohibits many forms of greenwashing, this legal framework has its own fair share of limitations. For example, there is currently no law setting out the minimum conditions for a financial product to be “green” or “sustainable.” In its report, the CQDE therefore recommends a better regulatory framework for sustainable finance.
The CQDE has outlined 26 recommendations which can be summarized in 6 categories :
- Regulating the supply of emerging products and services, such as voluntary carbon offsets, green bonds, and ESG rating services.
- Reinforcing rules for disclosing environmental risks and impacts in the financial sector.
- Reinforcing the professional obligations of financial intermediaries.
- Facilitating legal recourse against wrongdoers.
- Stepping up surveillance of misleading environmental claims.
- Informing and raising public awareness.
“These recommendations all have the same objective: to put an end to the current regulatory free-for-all that harms individual investors, ethical companies, and the financial sector in general, while undercutting climate and biodiversity protection objectives,” explains Julien Beaulieu.
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