Greenwashing in the European financial services sector

Greenwashing is a form of marketing which conveys a false message because it provides misleading information as to the sustainability of a particular product or service. Greenwashing can occur through deceptive practices (knowingly making a claim which is untrue or exaggerated), through negligence (making a statement about sustainability credentials without checking the facts) or where a business is ‘green-wishing’ (actually thinking a product has certain environment credentials).

Examples of this kind of activity in the financial sector include:

• making pledges about becoming carbon neutral by a set future date. Investors and members of the public may be critical of progress in meeting those targets if the business continues to fund projects which do not appear to support its aim in becoming carbon neutral, such as high carbon emitting projects;
• producing advertising which promotes its green initiatives or a particular ‘green’ investment fund whilst excluding information about funding businesses with substantial emissions;
• express claims made to investors about whether an investment fund has a sustainable investing criteria. This is separate from an advert as it involves direct representations made to investors.  

European regulatory approaches

A wide variety of measures are currently being taken at European, national and international level to counter greenwashing. In the EU the planned EU Ecolabel for financial products is to be expanded to include both the creation of a label for ESG benchmarks and the establishment of minimum sustainability criteria for financial products that advertise environmental or social characteristics.

Certain forms of greenwashing can also be challenged via EU and national laws against unfair commercial practices or requiring standarised labeling.

The EU Taxonomy Regulation sets the standard for sustainability of financial products across Europe, including which economic activities may be considered and advertised as environmentally sustainable and which may not.

Supervisory authorities such as the European Securities and Markets Authority (ESMA) or the German Federal Financial Supervisory Authority (BaFin) are increasingly finding difficulties and deficiencies in classification of ‘green‘ products, driven in part by the lack of specifications and guidelines for supervisory and rating authorities to make sustainability criteria measurable. Consequences can include liability risks, fragmentation of markets, distribution problems due to diverging sustainability criteria or misinvestment, which can also lead to misjudgment or lack of understanding of greenwashing risks. This may result in claims for damages by investors, who are faced with incorrect or insufficient information.

While the content of the required ESG disclosures is largely prescribed at EU level, the creation of the legal framework for monitoring and enforcing the requirements is the responsibility of member states. The problem is that it is not enough to know the minimum standards of categorisation, but also how these are to be measured and documented. This is a matter of ongoing concern for some EU member states.

In Germany, BaFin has published a guidance notice which defines the term “sustainability” on the basis of ESG criteria and illustrates physical and transition risks that may increasingly unfold. However, a planned BaFin directive on this has recently been suspended.

The French supervisory authority (AMF) has published an official guideline on how non-financial approaches should be incorporated in the management of the investment scheme now that the sole inclusion of such criteria no longer constitutes a change subject to the prior approval of the AMF. At the same time, the pressure to impose sanctions is being increased, with the French legislature passing a law in April for the first time that sanctions the advertising of products as "sustainable" without them meeting the necessary requirements.

Global standards-setting body the International Organization of Securities Commissions (IOSCO) recently published a Recommendation on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management (79-page / 706KB PDF), which aims to set standards to avoid greenwashing-related risks and to allow regulators to collect and process relevant, comparable ESG data as part of the investment management process. This will allow regulators, businesses and customers alike to better evaluate and monitor companies' ESG risks, progress and performance.

The approach in different jurisdictions demonstrates the need to look at regulation in other countries, particularly when there are plans to operate there in the future, or as an indication of what law mays be adapted and enacted in your country.

Routes of investor action

In the UK, the 2000 Financial Services and Markets Act 2000 offers a potential cause of action if an investor has suffered loss as a result of greenwashing – for example, buying shares in a company where the green credentials of the company have been overstated, or where a financial product is marketed as ‘green’ and therefore sold at a premium (or ‘greenium’).

Under FSMA s90, investors who bought shares under an IPO or rights issue could sue a public company that publishes any untrue or misleading statement in listing particulars or the prospectus; or, under section 90A, publishes a misleading statement or dishonest omission relating to the securities (for example in an annual report), or dishonestly delays in publishing.

Although there are currently no ‘live’ greenwashing claims under FSMA it’s easy to see how claims could increasingly arise when companies misleadingly promote either their own green credentials or those of a specific financial product, drawing investors keen to invest in companies and products which have strong green credentials. A fund manager or other investor, faced with a drop in the value or of their investment as a result of the true ‘green’ position being revealed, could seek compensation.

Managing risk through good governance

Wherever you are based, operate or sell into, good governance is key to managing the risks associated with allegations of greenwashing. Some actions to consider are:

• providing a comprehensive training programme to all members of staff regarding greenwashing and how it applies to your sector. Clear guidance is key to ensuring that risk is managed and to create a culture of compliance;
• ensuring that there is a procedure to follow prior to signing off on any environmental or ESG claims that are made about the business or its products and services. There should be a robust analysis of the claim and an understanding of whether the business holds objective, up to date evidence to support it. Up to date evidence is key as often evidence becomes historic very quickly;
• maintaining written records of the process which has been followed to support a particular claim. Each claim that is made should have a written set of materials to support it;
• regularly monitoring market developments, including understanding what regulators are saying and reviewing examples of greenwashing across all industries to ascertain the ‘lessons learnt’;
• positively engaging with supply chains, as suppliers often hold information on product sustainability; and
• utilising third party independent data to support claims where it is verifiable. Showing that a claim has been subjected to independent scrutiny can be particularly important where a matter is complex or controversial.

A multi-disciplinary approach

Greenwashing compliance is inherently multi-disciplinary in the UK, as it falls under the remit of different regulators and pieces of legislation which require different approaches under different regimes. The Competition and Markets Authority (CMA) has published a checklist for companies to assess their green claims used in advertising, while the FCA has published a number of principles that authorised ESG and sustainable investment funds should follow. There is a general theme for companies to ensure accuracy in terms of the information they are providing and to ensure that any statements made are not misleading to consumers, but the guidance differs in terms of what is required. The Advertising Standards Authority (ASA) is another body interested in misleading advertising claims in the greenwashing space operating under a different regulatory framework.

Anyone tasked with assessing the validity and legality of green claims would need a team of individuals who understand the full regulatory landscape, have an in-depth understanding of the product or services, know the claims being made, and understand what is required in terms of evidence and processes to ensure that any claims can be substantiated and remain up-to-date. Legal advice may be required across multiple specialisms such consumer protection, competition, regulatory, litigation, intellectual property, advertising and commercial and data protection. A multi-disciplinary approach is essential to ensure that a company is supported from compliance to managing and mitigating risks if there is a complaint or regulatory investigation. With proposals for the CMA to be able to impose fines up to 10% of turnover for breach of the rules, putting in place robust compliance teams and processes is essential.

Co-written by Tom Nener, Johanna Storz, Chris Dryland, Michael Fenn and Becky Ellis of Pinsent Masons. A version of this article was first published by Thomson Reuters Regulatory Intelligence.