The integrated clamp down on greenwashing

As asset managers become increasingly aware of the importance of ESG criteria in their portfolios, more stringent regulations surrounding greenwashing are being implemented around the world. This has raised questions about what constitutes a valid sustainability statement, and how stakeholders can protect themselves from falling victim to false claims or deceptive marketing tactics used to promote an investment as “sustainable”. 

The FCA sharpens focus on governance

This month the Financial Conduct Authority (FCA) expressed its commitment to tackling the risk of greenwashing by applying greater scrutiny over asset managers’ ESG and sustainable investing claims. As part of this initiative, the regulator wrote a letter outlining potential harms from these business models as well as steps that firms can take moving forward in order to improve what they refer to as “ineffective governance”and meet expected standards as set out by the Authority. This move further demonstrates their dedication towards increasing transparency within financial services markets and ultimately protecting investors across Britain.

The FCA letter refers to the surge in popularity ESG and sustainable investing products have seen over the past several years, saying it “will focus on the governance structures that oversee ESG and stewardship considerations, and we will test whether firms deliver on the claims made in their communications with investors.”

“We will particularly focus our supervisory activities on outlier firms that have been identified in previous supervisory activities or other ongoing surveillance.”

The FCA is taking a proactive approach to upholding ethical investments by ensuring asset managers have the governance infrastructure in place that actively monitors product development, ESG and sustainability integration into their investment process. It will also provide oversight of external information sources used for these matters as well as other sustainable claims made by firms.

Meanwhile, the consultation period for a proposed package of new measures designed to protect consumers and improve trust in sustainable investment products recently closed. Among intentions set out are restrictions on how terms like “ESG”, “green” or “sustainable” can be used in product names and marketing, as well as three categories of fund labels for sustainable investment products. 

Growing government action

Companies making green claims must be prepared for increased scrutiny and substantial fines as part of new proposed legislation. With the UK’s Digital Markets, Competition and Consumer Bill soon to be revealed, big companies are in danger of hefty fines if they do not abide by consumer laws. These potential penalties could reach up to 10% of global turnover for any infringements, whereas individuals may face individual fines reaching £300,000. To emphasise this point further Prime Minister Rishi Sunak has declared passing the bill a key priority for his government. Legal professionals conclude that the Competition and Markets Authority’s (CMA) widening power will extend as far as penalising false environmental claims.

In an effort to combat the growing greenwashing epidemic, the CMA published a code of practice for environmental claims. To ensure that consumers are not misled by false advertising in this area, they launched investigations into three major brands – Asos, Boohoo and George at Asda – last July. Though no conclusion has been reached on possible breaches of consumer law, they announced last month that they would extend their investigation to include household essentials such as food products and toiletries.

France lays down the law

With a new law soon to go into effect, the European Union is also setting out to ensure companies are held accountable for their environmental claims. France has already taken action by making it mandatory for firms supplying carbon-neutral products to provide comprehensive data on all related greenhouse emissions across its lifetime – a move approved of and likely to be mirrored by other member states in Europe.

The CMA intends to introduce regulations that will have serious consequences for any companies found guilty of greenwashing; with civil monetary penalties potentially imposed upon those in breach of core consumer laws. There is no denying that greenwashing is in the crosshairs of regulators worldwide.

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