A surge in demand for "green" financial products and services has occurred in response to global challenges such as climate change, and businesses are eager to emphasize their commitment to sustainability. Along with this, there has been a rise in regulatory focus on the threat of "greenwashing."
Financial institutions have stated commitments to reduce CO2 emissions (including "financed emissions") since COP26 last year, though many observers have noted a disconnect between what they say about climate change and what they do about it.
A green investment fund launched at COP26 is likely to be wound down, according to the Financial Times, "because institutions including big banks never delivered expected seed funding."
"Europe's biggest banks... have provided £24 billion to oil and gas companies that are expanding production, less than a year since pledging to target net zero carbon emissions," according to The Guardian.
Meanwhile, BlackRock, the world's largest hedge fund, is accused of "pprivately sooth[ing] oil industry concerns about their public support for greener investment," according to its CEO Larry Fink, who recently stated that climate change has put us "on the edge of a fundamental reshaping of finance."
Transparency is required.
Disclosure standards are gaining traction, such as those developed by the Task Force on Climate-Related Financial Disclosures and those being developed by the International Sustainability Standards Board. These will make it easier for nongovernmental organizations, consumers, and regulators to hold financial institutions accountable for their environmental credentials by providing a yardstick to compare actual performance to marketing claims.
When it comes to discrepancies between product labeling and product performance, the investment management industry has been singled out. Until now, there has been a lack of consistency and clarity in the market for "green" or environmental, social, and governance (ESG) funds.
The Financial Conduct Authority of the United Kingdom wrote to all UK-authorized fund managers in July, expressing concerns that many "applications for authorization of investment funds with an ESG or sustainability focus... contain claims that do not bear scrutiny."
Designing, delivering, and disclosing
The United Kingdom is not the only country dealing with these issues. To address concerns about greenwashing, the International Organization of Securities Commissions (IOSCO) has issued recommendations for securities regulators and policymakers on sustainability-related practices, policies, procedures, and disclosures in the asset management industry. The European Securities and Markets Authority's Sustainable Finance Roadmap 2022-24 prioritizes "tackling greenwashing and promoting transparency" as the first of three goals.
The Monetary Authority of Singapore recently announced that it is preparing anti-greenwashing measures for the asset management industry, which will include "ESG-specific requirements on fund naming, prospectus disclosures, and periodic reporting disclosures."
Consistency and clarity
The application of consistent environmental reporting standards across the economy is expected to provide greater clarity and assurance to both retail and institutional investors.
Indeed, many people in the investment management industry are concerned about greenwashing. The Independent Investment Management Initiative found that 88 percent of its members believe "the fund management industry has a problem with greenwashing" in a survey of its members. This, according to many investment managers, is due to the scarcity of consistent climate performance data from publicly traded companies. Recently, a group of leading investment firms called on publicly traded companies to disclose their environmental data through the Carbon Disclosure Project, a nonprofit organization.
Others point to a lack of consistency in how rating agencies define and assess companies' environmental, social, and governance (ESG) performance. According to SigTech research, 66% of professional investors have difficulty dealing with ESG rating agencies, which can provide "wildly divergent ESG scores at a company level." ESG ratings and data product providers should be regulated, according to IOSCO.
Words and actions
The above developments are by no means exhaustive, and they do not even begin to address the potential increase in greenwashing-related litigation or broader consumer protection developments, such as the UK Competition and Markets Authority's recently launched Green Claims Code. Greenwashing is a topic that will continue to gain traction, and companies will be required to show how their words match their actions.
By fLEXI tEAM