In our articles on the SFDR Regulation (2019\/2088) and the Taxonomy Regulation (2020\/852), we recalled that one objective of the European legislator in framing sustainable finance was to increase transparency in order to prevent greenwashing.<\/p>\n
Greenwashing is the misleading use of claims of good ecological practice in marketing or communication. Under the Taxonomy Regulation, it is the practice of marketing a financial product as environmentally friendly in order to gain an unfair competitive advantage, when in reality basic environmental standards have not been met [1]. The public is given information which, in substance or in form, distorts the facts so as to appear socially or environmentally responsible. In practice it takes several forms: a false portrayal of the green character of a product or service, misleading selling, an inflated price, or an undeserved green label.<\/p>\n
Environmental awareness has fuelled growing interest in sustainable finance and responsible investment. The Financial Times highlighted the trend: ESG investing is the fastest-growing segment of the asset management industry, with ESG fund assets up 53% to USD 2.7 trillion in 2021, according to Morningstar. Greenwashing accompanying that trend is a serious threat to addressing climate change.<\/p>\n
Recent events illustrate the point. On 2 June 2022, the head of DWS, a major asset manager, resigned after searches in a greenwashing investigation: products were suspected of having been sold as greener and more sustainable than they really were, according to the Frankfurt prosecutor’s office. A few days earlier, the US Securities and Exchange Commission had charged BNY Mellon Investment Adviser with misstatements and omissions concerning ESG considerations in investment decisions for certain funds; the firm agreed to pay a USD 1.5 million penalty.<\/p>\n
Although the SFDR and Taxonomy Regulations aim, directly or indirectly, to address greenwashing, the current rules do not yet match the stakes. Regulators appear to have taken the measure of the problem. Three examples follow.<\/p>\n
ESMA’s 2022-2024 roadmap (10 February 2022).<\/strong> ESMA notes that the causes of greenwashing can arise at many points of the investment chain, sometimes well before a product reaches an investor: issuer disclosures on the real sustainability profile of a listed entity, or poor-quality data available to funds. Regulatory arbitrage linked to the fast-moving legislative framework, and divergent applications of what constitutes a green product within the Union, aggravate the risks: lack of comparability, of transparency, and even mis-selling. ESMA calls on national regulators to play a key role in enforcing sustainable finance rules, to converge on a common understanding of ESG concepts, and to build up national supervisory capacity through exchanges of experience.<\/p>\n The ECB’s financial stability review (23 May 2022).<\/strong> The ECB warns that while transparency by non-financial companies is improving, progress by banks has been more limited, and the greenwashing risk is high given the absence of mandatory global disclosure requirements. Banks’ climate disclosures have improved since 2020 but still fall short of prudential expectations, notably on emission-reduction targets. Greenwashing poses a financial stability risk: it could lead to an underpricing of transition risk and potential fire sales of green bonds. Tellingly, the three main data providers (Bloomberg, Lipper, Morningstar) agree that a fund is ESG in fewer than 20% of cases, 317 funds out of more than 1,800 defined as ESG by at least one provider. Absent an ESG label and a common definition, investors rely on asset managers’ information and data providers’ classifications; clear labels could markedly reduce the risk.<\/p>\n ESMA’s supervisory briefing (31 May 2022).<\/strong> To ensure convergence across the Union in supervising investment funds with sustainability features and in fighting greenwashing, ESMA advocates common supervisory practices, so that investor protection does not vary with the domicile of funds marketed cross-border, and provides guidance on the supervision of funds’ marketing, pre-contractual and contractual documentation.<\/p>\n Interest in sustainable finance undeniably requires a clear and pragmatic legal and regulatory framework, and a coordinated response from regulators. This will be worth watching. Contact us for information on the above and, more generally, on the whole body of sustainable finance regulation.<\/p>\n [1] Taxonomy Regulation, recital 11.<\/p>\n This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" In our articles on the SFDR Regulation (2019\/2088) and the Taxonomy Regulation (2020\/852), we recalled that one objective of the European legislator in framing sustainable finance was to increase transparency in order to prevent greenwashing. What is greenwashing? Greenwashing is the misleading use of claims of good ecological practice in marketing or communication. 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