“‘Greenwashing’ is when misleading or unsubstantiated claims about environmental performance are made by businesses or investment funds about their products or activities. This can lead to the wrong products being bought – undermining trust in the market and leading to misallocation of capital intended for sustainable investments. “

UK government Greening Finance Roadmap, October 2021


Background

Most governments in the world, 197 of them, signed the Paris Agreement on Climate Change in 2015. They committed themselves thereby to “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C”.

At COP26 in Glasgow in November 2021, governments further endorsed the Glasgow Climate Pact, with promises to accelerate action on climate change, completing the Paris Agreement Rulebook, agreeing to “phase down” coal power, and committing in 2022 to revisit and strengthen their emission targets to 2030.

COP26 also saw significant pledges, not yet delivered, for further financial support for the Adaptation Fund, on areas such as loss and damage, and to redeem the much heralded pledge of $100 billion per year in climate finance.

Finance, to support the energy transition and the goal of net zero emissions by 2050 at the latest, has been a central part of the UK Presidency’s priorities for COP26. At COP26, it was announced that;

“Today, through the Glasgow Financial Alliance for Net Zero (GFANZ), over $130 trillion of private capital is committed to transforming the economy for net zero.”

At the same time, the Task Force on Climate-Related Financial Disclosures (TCFD) aims to secure the consideration of climate risk in all financial decisions, through requirements for it to be reflected in firms’ Strategy, Governance, Risk Management and Metrics and Targets. Increasingly, the TCFD is the basis for national legislation underpinning its requirements.

It has become clear to most firms that there are huge opportunities in financial products which can properly be described as ‘sustainable’ or reflecting ‘Environmental, Social and Governance’ (ESG) characteristics. It is reported that 49% of £9.4 trillion in UK assets were integrating ‘ESG’ in their investment processes in 2020.

However, this has led some firms to engage in making claims to ‘green’ characteristics for their products which cannot be substantiated. Hence the problem or ‘greenwashing’, also sometimes referred to as ‘climate-washing’.

In this article, it is suggested that there are (at least) six good reasons why firms would be well advised to avoid greenwashing in their own marketing and descriptions of their financial products. The reasons overlap, and more than one may apply to specific circumstances.

1. Governments

Governments are well aware of the problems that greenwashing can cause, and are alive to the issue. Avoidance of greenwashing is one of the main factors behind development by the UK government of its Green Taxonomy and Sustainability Disclosure Requirements, and by the EU of its more prescriptive and less generic rules in its Sustainable Finance Disclosure Regulation (SFDR). Although there are practical problems in trying to pin down and define properly sustainable financial products, deliberate greenwashing undercuts that machinery and is likely to be met with adverse consequences in frustrating the main objectives of government policy. As an example, the October 2021 press release about the Greening Finance Roadmap was headed;

“Chancellor sets new standards for environmental reporting to weed out greenwashing and support transition to a greener financial system.”

2. Regulators

Regulators are also well aware of the issue of greenwashing, and are increasingly willing to take steps to discourage it. For example, the Financial Conduct Authority said in a July 2021 letter to AFM Chairs;

“...we recognise that innovation and the rapid pace of change present the industry with challenges (such as improving ESG-related data and metrics)...” [but]
“...Against that backdrop, we are concerned by the number of poor-quality fund applications we have seen and the impact this may have on consumers. This must improve.”

This is a fairly clear warning to financial sector firms, followed up by a set of Guiding Principles, and some examples of poor products. The government’s Greening Finance Roadmap noted that these were applications for ESG-themed funds, ...”many of whose sustainability claims did not stand up to scrutiny”.

3. Law

As regulators develop clearer and stricter policies and specific requirements, greenwashing will come to constitute a specific breach of regulatory requirements, wherever it does not already do so. Although this very much applies to financial products, ‘greenwashing’ claims are also being actively challenged under other legal regimes such as consumer protection regulations and advertising standards, with examples from airlines to fruit juices. It can be expected that guidance such as the Competition and Markets Authority’s Green Claims Code will only become more detailed, prescriptive and mandatory, and that breaches will result in regulatory action.

4. Investors

Again as the government is well aware, the issue of green and sustainable investing is of lively interest to investors. The UK government’s Greening Finance Roadmap points out that;

“70% of the UK public want their money to be making a positive difference to people or planet.”

Clearly greenwashing could put that market at risk. The government has further noted that;

“Greenwashing was the most frequently cited concern amongst respondents to the 2021 Schroders Institutional Investor Study, with 60% of ESG investors raising it as a challenge. “

5. Litigation

Greenwashing is attracting increasing attention from climate litigation, which is itself surging. This is tracked and monitored (and shared) by several authoritative sources, with reports and case-notes on climate-washing litigation and legal liability for misleading climate communications.

6. Reputational risk

Greenwashing is, over and above the breach of specific laws or regulatory guidance, a matter of really significant reputational risk. There are instances of alleged greenwashing currently under investigation by international financial regulators and closely followed by other asset managers, which carry very significant reputational risk, even where the allegations are firmly denied by the firms involved.

Conclusion

These are some of the main reasons why greenwashing is set to become an increasingly high risk activity, where regulatory scrutiny and action is only going to increase. Firms need to have in place sufficient resources, systems and scrutiny to ensure that greenwashing claims are robustly challenged in-house before being made to the regulated world outside.


William Wilson

William Wilson has over 25 years’ experience working as a senior lawyer on environmental and energy laws and regulation within government, private practice and consultancy.

If you are concerned about greenwashing in your product marketing and are looking for clarification, our team of specialist lawyers can advise on ESG, finance or sustainability issues you may want to address.

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  1. Corporate Social Responsibility
  2. ESG
  3. Finance

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