Marybeth Collins
As sustainable finance grows, so does the risk of greenwashing—where financial instruments are misleadingly marketed as sustainable despite failing to meet credible environmental and social benchmarks. The IOSCO Sustainable Bonds Report highlights concerns around greenwashing in the $5.7 trillion
sustainable bond market, emphasizing the need for
stronger regulatory frameworks, transparency, and accountability.
Greenwashing Risks in Sustainable Bonds
Despite the rapid expansion of sustainable finance, greenwashing remains a serious threat. The IOSCO report identifies key factors that contribute to misleading sustainability claims:
- Lack of Clear Definitions: Green bonds have grown to 59% of all sustainable bond issuances, yet there is no universal definition for what constitutes "sustainable," leading to inconsistent standards across jurisdictions.
- Inconsistent Metrics: Among Sustainability-Linked Bonds (SLBs), 73% of KPIs focus on climate-related targets, while social impact KPIs remain underutilized. This limits investors’ ability to assess whether issuers genuinely meet sustainability commitments.
- Conflicts of Interest in External Reviews: 19 jurisdictions mandate independent sustainability verification, but many external reviewers are directly compensated by issuers, raising concerns about biased assessments.
- Weak Accountability Measures: In Indonesia, issuers must submit action plans when sustainability commitments fail, but in many jurisdictions, financial penalties for greenwashing remain minimal, allowing issuers to avoid significant consequences.
Industry Examples of Greenwashing
Several cases demonstrate the real-world impact of greenwashing risks:
- SLB Failures: Between 2019 and 2021, Utility & Energy, Transportation, and Oil & Gas companies dominated SLB issuances, yet 62% of these bonds failed to meet sustainability performance targets, highlighting the risks of weak oversight.
- Corporate Sustainability Backlash: A European retail company faced investor scrutiny when it failed to achieve SLB-related carbon reduction goals, undermining its ESG credibility.
- Regulatory Crackdowns: In 2024, EU regulators fined companies for misleading sustainability claims under enhanced disclosure rules, signaling a stronger enforcement trend.
Regulatory Measures to Prevent Greenwashing
To address these risks, policymakers are implementing stricter oversight and disclosure requirements:
- Standardized Taxonomies: Jurisdictions are adopting frameworks like the EU Taxonomy and ASEAN Transition Finance Guidance to set clear sustainability definitions.
- Mandatory Use-of-Proceeds Reporting: 20 jurisdictions require detailed disclosure on fund allocation to prevent misleading sustainability claims.
- Independent Verification: Regulators are introducing new third-party accreditation processes to strengthen oversight of external reviewers.
- Enforcement Mechanisms: Greenwashing is increasingly treated as fraud, with financial penalties and market restrictions imposed on violators.
Urgent Need for Transparency
The IOSCO report underscores the urgent need for transparency, standardization, and independent verification to curb greenwashing in sustainable finance. With sustainable bonds accounting for 14% of all private-sector bond issuances, addressing greenwashing risks is critical to maintaining market trust, ensuring investor protection, and driving legitimate ESG impact.
