In response to global challenges such as climate change, an upsurge in demand for “green” financial products and services has taken place, and firms are keen to emphasize their commitment to sustainability. Alongside this has emerged increasing regulatory attention on the threat of “greenwashing.”
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Since COP26 last year, financial institutions have outlined commitments to reducing their CO2 emissions (including their “financed emissions”), although many observers have noted a disconnect between what institutions are saying about climate change and what they are doing about it.
In one recent example, the Financial Times reported a green investment fund, launched at COP26, is likely to be wound down “because institutions including big banks never delivered expected seed funding.”
Elsewhere, The Guardian found “Europe’s biggest banks … have provided £24bn to oil and gas companies that are expanding production, less than a year since pledging to target net zero carbon emissions.”
Meanwhile, BlackRock—the world’s largest hedge fund, whose Chief Executive Larry Fink recently stated climate change has placed us “on the edge of a fundamental reshaping of finance”—stands accused of “privately sooth[ing] oil industry concerns about their public support for greener investment.”
A need for transparency
As discussed in a previous ICA article, disclosure standards—such as the Task Force on Climate-Related Financial Disclosures and those under development by the International Sustainability Standards Board—are gaining traction. These will enable nongovernmental organizations, consumers, and regulators to more effectively hold financial institutions to account over their green credentials, providing a yardstick by which actual performance can be measured against marketing claims.
The investment management sector has come under particular scrutiny when it comes to disparities between product labeling and product performance. Until now, the market for “green” or environmental, social, and governance (ESG) funds has suffered from a lack of consistency and clarity.
The problem prompted the U.K.’s Financial Conduct Authority to write to all U.K.-authorized fund managers in July over concerns that many “applications for authorization of investment funds with an ESG or sustainability focus … contain claims that do not bear scrutiny.”
Design, delivery, disclosure
The United Kingdom is not alone in addressing such issues. The International Organization of Securities Commissions (IOSCO) has published recommendations for securities regulators and policymakers regarding sustainability-related practices, policies, procedures, and disclosures in the asset management industry to address greenwashing concerns. At the European level, the European Securities and Markets Authority’s Sustainable Finance Roadmap 2022-24 highlights “tackling greenwashing and promoting transparency” as the first of its three priorities.
Most recently, the Monetary Authority of Singapore announced it is preparing anti-greenwashing measures to cover the asset management sector, including “ESG-specific requirements on fund naming, prospectus disclosures, and periodic reporting disclosures.”
Clarity and consistency
It is hoped the application of consistent environmental reporting standards across the wider economy will bring greater clarity and assurance to both the retail and institutional investment landscape.
Indeed, greenwashing is acknowledged as a concern by many within the investment management sector itself. In a survey of its membership, the Independent Investment Management Initiative found 88 percent believed that “the fund management industry has a problem with greenwashing.” Many investment managers attribute this to the limited availability of consistent climate performance data from listed companies. Most recently, a group of leading investment firms called on listed companies to disclose their environmental data via nonprofit organization the Carbon Disclosure Project.
Others cite the lack of consistency in how ratings agencies define and measure companies’ ESG performance. According to SigTech research, 66 percent of professional investors said they struggle with ESG rating agencies, which can provide “wildly divergent ESG scores at a company level.” IOSCO has called for oversight of ESG ratings and data product providers.
Actions and words
The developments outlined above are by no means exhaustive and do not even touch upon the potential increase in litigation associated with greenwashing or wider consumer protection developments, such as the U.K. Competition and Markets Authority’s recently launched Green Claims Code. Greenwashing is an area that will gain growing attention, and the need for firms to provide evidence of how their words match their actions will be paramount.
The International Compliance Association is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.