Greenwashing - a hinderance to sustainable finance

Posted: 21/09/2022

The UK Government has pledged to cut emissions by at least 68% by 2030 (based on 1990 levels) and aims to reach net zero by 2050.

Importantly for financial institutions and related businesses, it was also announced that the UK would be the world's first net-zero aligned financial centre. To meet this target there has been a significant growth in ESG and ‘green’ investments across the sector with a corresponding greater focus by both regulators and activists as to whether the green claims made by those operating in the sector are misleading. Not surprisingly, the use of the term ‘greenwashing’ now frequently appears in the media.

What is greenwashing?

Companies are accused of greenwashing if they promote financial products in such a way as to appear more climate-friendly and/or environmentally sustainable than they really are. Greenwashing is a complex and multifaceted issue that can occur at any stage of the financial chain and even occur where a company or a financial institution makes false or unsubstantiated sustainability claims abouts its products, activities or policies. It not only affects practices, investors and consumers but also financial market participants.

What is the impact of greenwashing and what are the regulators doing?

While the environmental reporting requirements for the financial services sector are still somewhat immature, it is evident that there is a stronger focus on clearer plans and policies to eliminate green washing. See our previous article that underlines some of the incoming regulation to watch out for.

Although further clarity and more regulations are expected towards the end of 2022, all financial institutions should now be considering the FCA principles of ESG and sustainable investments. As a reminder, these include but are not limited to the avoidance of misleading the description and promotion of ESG attributes; ensuring the ESG aims and purposes are achievable; and providing consumers with clear and accessible information about ESG funds.

Greenwashing can also create reputational issues which undermine the overall trust in sustainable finance and its effectiveness in the battle against climate change at a time when there is more pressure than ever on financial institutions and all other businesses to implement sustainable, environmental and social changes in their various business interactions.

The European Commission has called for the European Security Authority’s input on greenwashing monitoring and supervision. The European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority have also been asked to provide individual reports, in a co-ordinated manner, on several aspects of greenwashing and its related risks, as well as the implementation, supervision and enforcement of sustainable finance policies intended to prevent greenwashing.

The European Commission is currently adopting the steps outlined in the Strategy on Financing the Transition to a Sustainable Economy to monitor greenwashing risks. While key sustainable finance policies have already been implemented to address greenwashing in the financial market, the European Commission recognises that the monitoring of how greenwashing is being addressed is crucial and needs more attention.

How can you ensure that your business is not accidentally guilty of greenwashing?

As a key consideration in the day-to-day activities of all businesses or financial institutions is the implementation of green and sustainable polices, you should consider the following advice to help ensure that you cannot be considered to be greenwashing:

• avoid the use of “fluffy” language when describing the products and/ or services
• ensure that any ‘green claim’ can be substantiated
• only label products as ‘sustainable’ if a third party or public authority has certified the product
• when required, provide clear and accurate reports
• do not hide or omit important information when making ‘green claims’
• ensure that your business provides the whole picture
• the product and/ or service descriptions should be clear and unambiguous
• work with reputable companies to assess your business's green strategy in order to obtain credible green credentials.

Penningtons Manches Cooper continues to monitor the UK Government and European Commission’s approach to greenwashing. The introduction of clearer polices to combat these issues would be welcomed as, with clearer guidelines, the goalposts will be more measurable for businesses. We envisage that COP27 is likely to provide further clarity.

We have also developed an ESG checklist to help organisations identify which factors are most important to them and to assist them in identifying changes that can be made from a legal perspective. Please get in touch if you would like to receive a copy of the ESG checklist.

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