Can the Swiss government force industry to come clean on greenwashing?

Greenwashing is very dangerous for investors, says Vincent Kaufmann. It’s a huge risk when consumer associations attack companies based on allegations that they are exaggerating their climate achievements or misleading consumers. © Keystone / Peter Klaunzer

The Swiss government’s plan to crack down on greenwashing should focus on bringing more transparency in order to separate genuine climate action from good public relations, says Vincent Kaufmann, CEO of the Geneva-based sustainable investment foundation Ethos.

Last week the Swiss government announced the finance ministry will draw up a bill aimed at preventing greenwashing as terms like “green” and “climate neutral” proliferate in the financial industry. The decision comes amid a wave of allegations against companies and banks that they overstated their sustainability credentials.

The European Union (EU), among other regulators, has taken similar steps to rein in on greenwashing in the last few years. SWI swissinfo.ch spoke to sustainable investment expert Vincent Kaufmann about why the bill is important and whether it’s enough to regain consumer and investor trust.

Vincent Kaufmann is the CEO of Ethos, Swiss Foundation for Sustainable Development, which was created in 1997 by two Geneva-based pension funds and is currently composed of over 250 institutional investors with the aim to incorporate sustainable development principles into investments. Merlin Photography Ltd.

SWI swissinfo.ch: How big of a problem is greenwashing?

Vincent Kaufmann: Greenwashing is very dangerous for investors. It’s a huge risk when consumer associations attack companies based on allegations that they are exaggerating their climate achievements or misleading consumers.

I think the Deutsche Bank caseExternal link, whereby a whistleblower revealed that the bank had overstated its sustainability credentials, was a wake-up call. There has been a lot of incoherence by investors and a lot of companies that have net zero climate goals but no path to get there.

I don’t think greenwashing is always based on the will to lie or false marketing though, it’s also about having the wrong definition. There are investors or companies that want to be green but due to the lack of common definition and regulation around it, they may be calling something green that isn’t.

SWI: How do you define a “sustainable” investment?

V.K.: It’s a tricky question. It’s on the one hand looking at the impact the company you invest in has on society and the environment, and on the other hand, how they manage ESG risks – so the environmental, social and governance factors that can harm the company financially.

I think you should concentrate not only on how you select companies in your portfolio when you define what’s green and not. It’s also about how you use your voting rights as a shareholder to push for change. An investor might exclude a fossil fuel company from its portfolio to be more sustainable but then they lose their voting rights to influence the company at the general meeting where resolutions can be put forward that push to change the company’s business model.

SWI: Is there a risk that perfect becomes the enemy of the good when it comes to defining what is sustainable?

V.K.: I think the European Union has done a good job in defining what is and isn’t sustainable in its taxonomy launched a couple of years ago. We still see a lot of Swiss companies claiming to have some green activities without a common understanding of what that includes.

What the EU is also doing is requiring companies to disclose how much of their revenues or capital expenditures are in what it defines as “sustainable”. This is really important information for an investor to say how sustainable a company really is.

If you look at TotalEnergies as an example: they claim to invest in low carbon technology but if you look at their capital expenditure plans for 2030, only about 30% is going into such technology while around 60% is to maintain or invest in new oil and gas fields. This is a case of a company having a net zero goal but lacking a path to get there.

SWI: Do you think regulation is the answer then?

V.K.: We need to redirect financial flows in line with the Paris Climate Agreement. If you expect financial markets to do this without regulations and clear definitions, that’s impossible. The financial market will always try to maximise returns.

SWI: Do you think the Swiss regulation will go far enough?

V.K.: I think the regulation will help clarify what is meant by greenwashing but it should also push for more disclosure of information, similar to what the EU is doing. We need to define to what extent we can accept a company as sustainable if it only invests 30% in what is defined as sustainable.

Next year, the counter-proposal to the responsible business initiative, which was voted on by the Swiss people a couple years ago, will come into force. It is a good start, but it doesn’t push companies to report on the percentage of sales in green or responsible activities. The first goal of the regulator should be to increase transparency from companies to help investors make decisions.

SWI: In the latest announcement, the Swiss government kept the door open for self-regulation by the financial industry. Is there still hope for voluntary self-regulation?

V.K.: I’m sceptical regarding self-regulation. The enforcement is complicated. It is not sufficient to have the Swiss Banking Association regulate its own members.

Switzerland signed the Paris Climate Agreement and we voted in favour of the CO2 law [in June]. We can’t just let the professional association implement it.

SWI: There are constant headlines about investors that are sceptical of ESG and more pulling out of so-called sustainable products like green bonds. Is the ESG backlash really gaining momentum?

V.K.: You can’t ask the economy to transition alone if there is no democratic and political will to do so.

This ESG backlash is not because investors don’t want to invest in ESG, it’s because political parties like the Republicans in the US see ESG as a threat to their political agenda. Even in Switzerland, the election results a couple weeks ago showed the party that campaigned against the climate law wining the most support. The Green party, on the other hand, received less support (-3.4%).

Taking into consideration ESG factors is just managing financial risk nowadays. As an investor, you need to know whether a company is potentially facing corruption accusations or has a high employee turnover rate or is polluting the planet. Risk management, including ESG risks, is part of the fiduciary duties of investors.

But the question is, do we want to focus more on companies which are triggering change? They will be successful if there is a political will for the climate transition.

SWI: Ethos was targeted by climate activist NGO Extinction Rebellion a couple years ago for your investments in big companies like Nestlé and Holcim. How do you respond to their criticism and see your role vis-à-vis climate activists?

V.K.: I think what we each do is very complementary. What they [Extinction Rebellion] didn’t understand back then was the influence we can have as a shareholder by staying invested in a company. Fortunately, we were able to discuss with them and to explain how we are using our voting power to influence companies. Of course, Nestlé and Holcim aren’t perfect, but we have pushed them to publish climate reports and improve their climate strategy. Holcim now has the most ambitious CO2 reduction target in the cement industry. Unfortunately, we won’t rid economies of cement overnight.

Edited by Samuel Jaberg.