Greenwashing: what’s next for regulators?

What are regulators in the UK, Europe, the US and elsewhere doing to tackle greenwashing?

“Financial regulators are determined to maintain the integrity of the environmental, social and governance (ESG) investment market and to ensure fund managers don’t exploit investors through unsubstantiated or misleading claims. Regulation is developing at pace across both the US and European markets.

“In February, the European Securities and Markets Authority (ESMA) identified ‘tackling greenwashing and promoting transparency’ as one of the top three priorities for its Sustainable Finance Roadmap. The latest supervisory statement outlines that the ‘impact’ designation should only be used for funds making investments with the intention of delivering a measurable social and environmental impact.

“Furthermore, ESMA advises that ‘sustainable’ or ‘sustainability’ should only be used by funds disclosing under article nine of the Sustainable Finance Disclosures Regulation (SFDR) or article eight of the SFDR, where the fund part-invests in economic activity with an environmental or social objective.

“In May, the US Securities and Exchange Commission (SEC) put forward proposals that would require funds that say they consider ESG matters to provide investors with information in the prospectus about those ESG factors, along with the strategies they use.

“Additionally, funds labelled as ‘ESG-focused’ would need to disclose details about the criteria and data used to achieve their investment goals, along with annual disclosures detailing progress towards ESG goals.”

Is there a risk that funds might over-react in order to avoid potential accusations of greenwashing?

“Greenwashing claims have evolved over the past decade, and it’s a natural point for funds to reflect on their own actions to ensure they’re aligned with market practice, but I don’t expect greenwashing to affect the considerable positive momentum that ESG investment has gained.

“Funds, as a financial institution, are familiar with a fast-developing regulatory landscape and having to adapt to investor preferences, so they are in a good place to readjust as definitions of green investment evolve.

“Personally, I’m pleased to see greater scrutiny applied to the claims made for ESG investment because the focus must remain on the impact delivered rather than the volume of assets. There’s a sizable investment gap towards the goals of the Paris Agreement, and we must ensure that the private capital deployed works towards society’s ambitions.

“Clear investment labels increase market efficiency and allow investors to make informed decisions about where best to allocate funding towards these ambitions. In the absence of this inspection, we may develop a false sense of security where we believe ESG investments are delivering the necessary action.”

“Funds that are taking the necessary steps to integrate ESG into their activity, including measurement and reporting, shouldn’t fear greenwashing if they’re transparent with the market. The global ambition remains the same: decarbonise our economy and do so at pace”

Is there a danger that fears over greenwashing could distract from the bigger threat to funds from climate risk and being left with stranded assets?

“It’s important to remember that greenwashing claims are driven by the way in which a fund communicates its strategy, rather than the strategy itself. The perceived increase in greenwashing risk shouldn’t distract funds from identifying and managing the climate risk presented through their investment activity. A fund’s ability to utilise mature ESG risk assessments will likely act to safeguard value, while providing a basis to identify new opportunities to generate returns.

“Furthermore, those funds that are taking the necessary steps to integrate ESG into their activity, including measurement and reporting, shouldn’t fear greenwashing if they’re transparent with the market. The global ambition remains the same: decarbonise our economy and do so at pace.”

Can traditional fossil fuel companies that are making the transition from oil and gas to renewables and hydrogen be included in a sustainable fund, or might this be considered greenwashing?

“Transparency and intent are key here. The discussion regarding oil and gas is nuanced – and rightly so, given we’re not in a position to completely turn our backs on traditional fossil fuels without significant social costs. Financial institutions need to support a just transition, which includes working with traditionally ‘brown’ companies to accelerate action.

“Oil and gas companies that have set out credible transition plans, and can demonstrate progress in line with those plans, should retain access to funding and financing so as not to halt global progress, including support for workers to re-skill where existing roles are made redundant in a net-zero economy.

“Therefore, ESG funds may find that they wish to target the transition by making investments in oil and gas companies, but I’d personally want to understand how the investment is targeting decarbonisation and that there’s governance in place to monitor progress.

“In regard to a ‘sustainable’ fund, as we’ve explored, the definitions can vary across jurisdictions, so it’s important that regional best practice is followed. This includes any stipulations regarding ‘harmful’ climate activity, such as traditional oil and gas exposure.

“A fund should be transparent about the investments made into oil and gas, including what ESG assessment has been conducted and how the targeted investment is delivering an impact in line with the fund’s strategy.”

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