@Pixabay.

The Loan Market Association (LMA), supported by King & Spalding, published its new Sustainable Finance Insights report on “Greenwashing, Understanding and navigating the impact for the loan market”.

In it, the LMA said that the sustainable finance market has evolved rapidly since "that first green bond [was issued] nearly 20 years ago".

It said that as part of this green finance revolution, the Green Loan Principles (GLP) in 2017, the publication of the Sustainability-Linked Loan Principles (2019) (SLLP) and Social Loan Principles (2021) (SLP) represented further milestones in the development of the sustainable finance market, had all become industry staples.

Together, GLP, SLLP and SLP are known as the Green, Social and Sustainability (GSS) Principles. The report was formed from a series of roundtables and discussions towards the end of 2024 and the early part of 2025, with participation from across the banking and private credit sectors.

The LMA works in the loan market in EMEA to support the loan markets and focuses on enhancing liquidity, efficiency, transparency, and sustainability. It has nearly 900 members across 69 jurisdictions, across international capital markets, including institutional investors, private and public sector issuers, banks, non-banks, technology platforms, and market infrastructure providers across the UK, US, EMEA, and Africa.

What does the report say?

The report specified that additional clarity was one request from many respondents.

“Greenwashing regulation and initiatives appear to have helped bring some degree of clarity around the scope and breadth of greenwashing,” it said.

“The rapid evolution of complex sustainability standards and regulations, combined with related usability challenges, has added significantly to the compliance burden."

It also said that “changes to governance, processes and systems” were being seen.

“Robust internal governance processes and systems had already been put in place in response to market and stakeholder pressures, reputational risk and existing sustainability-related regulation,” it said. “These processes and systems have not changed materially in direct response to new greenwashing rules, guidance and initiatives.”

However, a recurring theme was the increasing compliance burden, which is adversely impacting GSS origination.

“The rapid evolution of complex sustainability standards and regulations, combined with related usability challenges, has added significantly to the compliance burden (including administrative, assurance and regulatory compliance burden and associated costs) for borrowers and lenders alike. This is impacting the cost/benefit analysis of entering into GSS, which may already be seen by some as riskier from a greenwashing risk perspective.”

The report showed that some clarity was incoming in different areas, though, with several surveys of participants showing more faith that simplification and clarification measures by regulators were helping ease fears of inadvertent non-compliance around greenwashing.

What is the background?

The issues mentioned in the new report have been of increasing concern to the industry over the past few years with many red flags appearing.

Several reports said that those in the institutional investment world are at risk of greenwashing inadvertently due to compliance and regulatory burden and that more needs to be done to help.

This was recently highlighted in another report, which said that – in the EU - nearly a quarter (23%) of all Article 8 funds remained at risk of greenwashing –compared to just 3% of Article 9 funds being at risk.

In the 2025 ESG and Sustainable Barometer report, by data provider MainStreet Partners, which analysed over 9500 investment strategies managed by more than 460 asset managers, it said that the proportion of Article 9 funds that have a greenwashing risk has reduced over time but that for fund operators there was still a minefield of risk involved with categorisation for funds and that mistakes could be easily made – and easily discovered by regulators.

Furthermore, other reports have also touched on an emerging tension. A report from February said that there is a growing demand for transparency in reporting from asset managers by asset owners, according to Cerulli Edge—U.S. Institutional Edition. 

Due to this increasing pressure from stakeholders – which includes regulators, clients, and the public - asset owners were now requiring asset managers to provide clear and comprehensive reports on ESG-related activities more so than before.

However, solutions exist. Some said that over half of fund administrators (55%) are struggling with data acquisition and governance due to the rapid growth of private markets, which could expose institutional investors to greenwashing risks. However, some recommended artificial intelligence as the key to help with the burden.

What are the effects?

The complexity of rules and the deluge of different bodies and regulators offering ‘solutions’ as well as sometimes conflicting advice was said to be leading to unintended consequences of those in the space spending more effort on risking non-compliance than trying to be innovative or maximise returns.

"Market participants referred to confusion around terms to address greenwashing, such as “greenhushing”, “green bleaching”, “blue/pink washing”, “impact washing” and “SDG washing”."

“Participants emphasised that the need to comply with existing sustainability-related regulation had been the main driver for strengthening governance, processes and controls around GSS products,” it said

It added that the need to comply with existing sustainability-related laws and regulations, combined with reputational risk and other stakeholder pressures was the main driver for firms to strengthen governance, processes, and controls to address greenwashing risk and ensure the credibility of GSS products. This was instead of greenwashing rules and regulations being the main driver.

Market participants also referred to confusion around terms to address variations of perceived greenwashing, such as “greenhushing”, “green bleaching”, “blue/pink washing”, “impact washing” and “SDG washing”.

Against this backdrop, participants several factors had contributed to a levelling-off in GSS products such as adverse publicity, reputational risks, and the risk of potential enforcement action resulting from accusations of greenwashing.

So, what can be done?

The LMA report said there was increased rigour and analysis of GSS products, which was good for the industry as a whole, but the overall effects were yet to lay out fully in the market.

“The focus on greenwashing, and the clarification of the scope and breadth of the greenwashing “phenomenon”, have helped to drive meaningful discussions between lenders and borrowers/sponsors around key concepts in sustainable finance, such as the materiality of KPIs and ambition of sustainability performance targets (SPTs),” it said.

"The multi-faceted and complex nature of greenwashing underlines the need for all players in the wider ecosystem to understand their role in tackling greenwashing."

The complexity of greenwashing was also highlighted as “the multi-faceted and complex nature of [it]” and broad reference to sustainability claims across the sustainable investment value chain is a significant barrier to structuring GSS products, said the report.

It added that greenwashing’s complexity was hampering innovation and efforts to mobilise capital towards sustainable business models and activities.

There were some bright spots though with simplification and clarification by regulators and industry bodies helping for instance when asked “Have the European Securities and Markets Authority (ESMA), fund naming guidelines provided greater clarity regarding the link between fund names and lending?” more than 70% of credit fund representatives said they agreed.

"The multi-faceted and complex nature of greenwashing underlines the need for all players in the wider ecosystem to understand their role in tackling greenwashing," said Sukhvir Basran, ESG Partner, Finance & Restructuring, King & Spalding, in the report.

This all means that while greenwashing is still a big risk for many institutional investors - from both an investment strategy and an operations standpoint – work being done is helping. However, the road is long, and it will take time.

 

Please Sign In or Register to leave a Comment.