It is understood by now that the 2008 financial crisis was triggered by the abuse of credit default swaps, which were set using LIBOR. LIBOR rose every day, increasing interest rates significantly. After comprehensive investigations, it was unveiled that multiple banks had been colluding together to manipulate LIBOR rates for profits. These manipulations projected higher creditworthiness for banks in the marketplace. However, by manipulating LIBOR, lenders indirectly caused a cascade of mispriced financial assets throughout the entire global financial system.
The manipulation of the rate by financial institutions for their profits and projected creditworthiness called into question the reliability of the LIBOR rates and a market-wide loss of confidence. As a result, in 2017, the Financial Conduct Authority (FCA) announced that it would no longer use its powers to compel market participants to make submissions for determining LIBOR after the end of 2021. The FCA cited a lack of activity in the underlying interbank markets as a key concern and reasoned, “if an active market does not exist, how can even the best run benchmark measure it?” Consequently, it is envisaged that LIBOR will not be published after the end of 2021.
The correlation between ESG and LIBOR is not an obvious one, but a cautionary tale exists, written between the lines. The common denominator between the debacle in the determination of an interbank averaged interest rate and ESG compliance and reporting is 'exaggeration'. In the world of ESG investing, this is called 'greenwashing'. Greenwashing can be defined as a process of projecting a false impression or conveying false impression by an entity to project it as an environmentally sound or ESG compliant business.
ESG has hurriedly become the need of the hour.
Especially in the wake of the aggravating climate crisis, there is a growing demand for environmentally sound products and environment friendly businesses. Our recent research says that 62% of companies are considering incorporating environmental and social policies in to their business. To capitalise on this sentiment, simply put, more profit maximisation, several companies have found clever gimmicks to appear 'greener' than their competitors. However, with the increasing number of developments in ESG principles and regulations, many marketing and advertising gimmicks have been unveiled.
It is estimated that over the coming years, genuinely environmentally sound enterprises will experience an increase in share prices, while the entities practicing greenwashing might see short-term growth only. The year 2020 saw an estimated USD 38 trillion spent on assets for ESG; this figure is expected to reach USD 53 trillion by 2025. However, corporations need to know that with the expected tightening of ESG rules in the future, several investments made to conform to ESG principles will likely diminish. Europe saw a drop in the value of ESG investments by USD 2 trillion between 2018 and 2020 due to tightening of rules to rectify labelling exaggerations.
It is important for companies to realise that greenwashing is a problem. Not only is it unjust to the cause that ESG plays in the preservation of the environment, it is a counterproductive business practice. However, it may not always be simple for companies to define greenwashing from environmental compliance. The unfortunate truth is many companies even accidentally end up greenwashing, which could not only tarnish their brand reputation in the long-run but also dissipate large ESG driven capital investments.
Fortunately, through our understanding of ESG, we regularly provide our clients with legal insights and thought leadership, addressing global challenges and updates to modern ESG regulations. We also assist our clients in identifying the various ESG challenges and prevent accidental greenwashing.
As a part of our Bonds, Loan and Sukuk Conference being held in Dubai on the 14th and 15th of September 2021, we are launching an ESG focused report, we explore how the investment landscape has changed globally in recent years, highlighting some of the key reporting standards and frameworks that companies need to consider. If you are interested in receiving a copy of this report, please get in touch with the authors of this article.