Climate Finance Greenwashing Is Happening: We Have Tools to Prevent It, But Need Adoption At Scale

By Natalie Bridgeman Fields

While a known barrier to addressing climate goals is the fossil fuel lobby, greenwashing in the booming climate finance industry is a hidden one. Greenwashing – money that purports to address climate change but doesn’t, or even does the opposite – is nefarious because it is easily hidden, and therefore hard for investors and the average climate conscious consumer to address. But community-driven accountability tools exist that can prevent greenwashing, and it’s urgent that investors demand that they become common practice in a hundred trillion dollar industry that is scaling up with private sector support to address our climate crisis.

Where climate investment enters areas with weak regulation, poor governance, and corruption (in both rich and poor countries), climate finance is unlikely to meet its mark and avoid harm unless local communities are co-creators, designers, stakeholders, decision-makers, and co-owners of these investments. They rarely are. Short of a wholesale redesign of how investment decisions are made, communities need accountability mechanisms as avenues to be heard, as they are the first witnesses when things go wrong.

What Harm From Greenwashing Looks Like

It’s largely because of accountability mechanisms that already exist in public development finance that we have a mounting body of evidence of egregious social and environmental harm caused by climate projects that fail to take local voices into account. I’ve worked across three continents with communities harmed by projects financed in the name of “green” investing: a biofuel project in Liberia leading perversely to deforestation and a more environmentally intensive dependence on charcoal; a hydropower project in Mexico threatening Indigenous villages with deforestation and environmental destruction of a fragile freshwater ecosystem; and a conservation project in Myanmar that risks displacing Indigenous people from the mangrove and forest lands they have stewarded for generations, only to increase risks of illegal logging.

The good news is that we now have a picture of what’s happening that’s more than anecdotal. A tiny subset of communities that experience harm have found out about and have succeeded in filing thousands of complaints to banks’ own independent accountability mechanisms about harm they personally experience tied to investments. While the communities who are the most harmed often have the least access to accountability mechanisms, the body of complaints that do exist paints a picture that investors now have the duty to digest and use to avoid repeating the same mistakes that will most certainly lead to future harm.

In sectors as diverse as infrastructure, education, and clean energy, data shows that skipping meaningful due diligence is a common first mistake, but a predictable and devastating one. Regardless of intention, incentives are currently set up to promote greenwashing by getting money out the door quickly so that projects get up and running fast and investment metrics are hit, regardless of harmful local impacts – which can translate to poor investment outcomes and negative climate impacts over the medium-term. But taking the time to approach due diligence as a meaningful opportunity for local community consultation can yield integrity and sustainability of climate finance investments.

Community-driven Accountability Systems Are A Greenwashing Antidote

Learning from past complaints can certainly help, but just as important is the urgent need for accountability mechanisms to be put in place in the climate finance space. New mechanisms are needed precisely because ESG, impact investment and climate investment from powerful actors is flowing into areas where communities are not protected through rule of law, and are explicitly silenced when they speak out. Investors tacitly buy into abuse when they rely on good governance to protect local people in areas where there is no evidence of good governance. I have worked with communities in places like Ethiopia, Myanmar, and Democratic Republic of Congo, where project outcomes rely on a fictitious benevolent government that seeks to uphold the rights of project-affected people. The cost of this reliance is dire for communities, that are made worse off, and climate impacts, that are never realized.

So what would climate finance that avoids greenwashing and is accountable to communities look like? The system has two parts: standards, and mechanisms to hold investors accountable to those standards when communities file a grievance.

On the standards side, while many investors already use the IFC’s Performance Standards as a due diligence framework for investment, I frequently encounter investment fund managers working in high-risk areas who are unfamiliar with any due diligence standards. Consumers who care about greenwashing should require social and environmental due diligence standards of any operation their money touches. For ESG and impact investors engaged in climate finance, impact measurement and management standards need to continue to follow the lead of the UNDP SDG Impact Standards, the Global Reporting Initiative standards (coming into effect in 2023), and the World Economic Forum and International Business Council’s Stakeholder Capitalism Metrics, all of which require adherents to have community-driven accountability mechanisms in place.

Just as accountability mechanisms now exist at every major development bank and most national development finance agencies (examples include the World Bank Group, African Development Bank and the Dutch development bank, FMO), major financial institutions like JP Morgan and Blackrock, philanthropy consortiums like Tara or the Global Energy Alliance for People and Planet, and network hubs serving ESG and impact investors must adopt them too. These mechanisms should be able to address the community grievances in an accessible, fair and effective manner, with the ability to fund remedy where it is required to address a community’s expressed needs.

Climate investors can demonstrate that they are serious about sustainable climate action that does not perpetuate harm to communities, and reduces greenwashing risks, by establishing robust accountability systems before the money goes out the door. Without meaningful accountability, the money may flow, but without the positive impact that our planet, and the people who live on it, require.

Natalie Bridgeman Fields is the founder and executive director of Accountability Counsel, an organization that engages in policy advocacy, research, and legal counsel for communities harmed by internationally financed projects.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.