The pressure on banks and other financial institutions to assume responsibility for environmental issues has grown considerably. But addressing the fight against global warming should not simply be seen as a burden – it can also be an opportunity.
What are the risks for firms that seek to publicise sustainable objectives?
In our view, one of the key risks is a direct result of one of the many forces that are driving increased visibility of these issues – regulation. Firms that operate in multiple jurisdictions or across multiple sub-sectors of the financial services industry are subject to ever more regulation which is being applied on different timetables and with different geographical reach. Many of the measures also include moving targets – for example, many asset managers and owners operating in Europe will have rushed to make their initial disclosures under the Sustainable Finance Disclosure Regulation (SFDR) in 2021, but then found they needed to make further changes once they started disclosing under the Level 2 rules from June 2023.
Firms that operate in multiple jurisdictions or across multiple sub-sectors of the financial services industry are subject to ever more regulation
This can lead to a greater risk for firms of accusations of greenwashing, arising from intentional action (firms making inaccurate statements or promises they cannot keep) or unintentional action (where they fail to meet particular disclosure requirements, or only comply with some but not all).
Where do these overlapping requirements come from?
We highlight below a few examples of regulations covering ESG disclosures to show how a firm with cross-border operations can find itself subject to multiple layers of regulation, sometimes seeking to achieve different aims or cover different activities. The aim of many of these regimes is to avoid ‘greenwashing’ practices that mislead investors about the real contribution of issuers and products to meeting green commitments.
France was the first country to make it compulsory for investors to publish information on their contribution to climate objectives and the financial risks associated with the energy and ecological transition. France imposed requirements on asset managers (in 2010), and on insurance companies and institutional investors (in 2015), to disclose how they integrate ESG objectives into their investment strategy.
Greenwashing has been expressly classified as a misleading commercial practice since August 2021 in France. A commercial practice will be misleading if it is based on false allegations, indications or presentations that are likely to mislead about the environmental impact of the product sold or scope of the environmental commitment. In addition to a 2-year prison sentence and a fine of EUR 300,000, misleading commercial practices based on environmental claims can now be punished by a fine “proportionate to the benefits derived from the offence”. This can rise to 80% “of the expenditure incurred in carrying out the advertising or practice constituting the offence”.
As is often the case with ESG regulation, the UK is a couple of years behind Europe. On 28 November 2023, the FCA’s Sustainable Disclosure Requirements consultation crystallised with the publication of Policy Statement 23/16. The new regime will introduce anti-greenwashing rules from May 2024, with a longer roll-out period for a new investment labelling regime.
Firms operating in both the UK and Europe face extra challenges. Whilst many of the key planks of European sustainable finance regulation (such as the Taxonomy and CSRD Regulations) were not on-shored post-Brexit, it is clear that third country firms actively marketing into, or operating in, the EEA still need to comply with many of them.
Meanwhile, the UK has been seeking to implement a sustainable disclosures regime based on a separate UK green taxonomy that will align with the Taskforce on Climate-related Financial Disclosure (TCFD). Although there will be many similarities with the EEA regime, there will inevitably be differences that could trip-up firms that need to comply with both UK and EEA requirements in parallel.
The fight against greenwashing in the UK has also very much begun. The FCA recently conducted a review into how authorised fund managers approach ESG and sustainable investment funds. We envisage the FCA making more use of these types of investigations in other sub-sectors in future given its broader focus on Consumer Duty implementation and financial promotions compliance.
We envisage the FCA making more use of these types of investigations in other sub-sectors in future given its broader focus on Consumer Duty implementation and financial promotions compliance.
We have seen an investigation in Germany into whether the products offered by a bank and its fund management subsidiary were as green and sustainable as they were presented.
The wider picture
Financial institutions are not only subject to financial sector specific regulation. At the EU level, there are numerous other rules that firms need to be aware of. In March 2022, the European Commission put forward a proposal for a new Directive aimed at protecting consumers by prohibiting “generic and vague environmental claims” and other greenwashing behaviours. This was followed, in March 2023, by the proposed Green Claims Directive, setting out more specific rules designed to regulate the use of so-called explicit environmental claims.
The European regulatory authorities are not to be outdone. The ECB is calling on banking and financial institutions to take appropriate measures to protect themselves against the reputational and liability risks inherent in greenwashing practices. The European supervisory authorities have drawn up an inventory of greenwashing practices in the financial and banking sector.
Furthermore, aside from sustainability measures, firms will also be subject to adjacent regulations such as the prevention of modern slavery and anti-bribery and corruption. France has imposed a corporate duty of care requiring companies to establish a due diligence plan to prevent human rights violations, and to ensure the health and safety of individuals and the environment. These laws look at the actions of the company itself and the activities of subcontractors and suppliers. In Germany, the supply chain act (Lieferkettengesetz) was introduced in 2023 and sets out requirements for companies’ due diligence obligations in respect of their supply chains.
But what about green hushing?
It is perhaps little wonder that the term ‘green hushing’ was frequently spoken of in 2023. It describes businesses that choose not to publish their climate targets in an attempt to avoid allegations of greenwashing, or to avoid becoming a pawn in the culture wars that fill some areas of the press and social media. We have also seen companies (in particular publicly traded ones) that are subject to non-disclosure obligations in their financing agreements, meaning they are unable to report about some aspects even if they wanted to.
Protecting your firm against greenwashing claims
Your approach will be highly dependent on a firm’s exact footprint and aspirations. However, it is likely to include some of the following:
- Ensure you understand where the firm and its wider group operates, both geographically and across which industries and sub-sectors. Then map the measures which apply to you, and when they are likely to change (for example, rolling implementation dates).
- Ensure that statements made publicly are backed up by verifiable facts (with records carefully maintained), and that targets can be measured and monitored.
- Check that subsidiaries and divisions (particularly those in other jurisdictions or operating under different accounting regimes) understand what inputs you require from them so you can meet changing group-level reporting requirements on time.
- Monitor your supply chains and include provisions in your agreements to ensure that you can request any necessary information (and incorporate it into your public reports) to meet your obligations.
- Maintain records of your firm’s public statements about aspirations and objectives. Where they change over time, or targets become unachievable, consider whether correcting statements need to be issued.