How greenwashing can be prevented, or how the risk of being accused of ‘greenwashing’ can be forestalled by effective compliance.
In our last article in this series, we identified four ‘shades’ of ‘greenwash’ that could apply to financial services activities purporting to contribute to environmental social or governance (“ESG”) sustainability and responsibility (“S&R”):
In this article, we consider how greenwashing can be prevented – or, more importantly for firms that wish to have credible ESG offerings, how the risk of being accused of ‘greenwashing’ can be forestalled by effective ‘ESG compliance’.
The biggest risk for such firms is that, despite their best intentions, they fall into the traps of being or seeming ‘superficial green’ or, more likely, ‘unclear green’. How can these traps be avoided?
In short, it seems that governments and regulators do not envisage that the mores or economics of the marketplace are sufficient to prevent greenwashing, and that the solution principally involves extensive and prescriptive regulation as to ongoing and pre-contractual disclosures, in terms of firms’ –
Some of that regulation is already in place, and firms need to grasp how its terms relate to their activities, and especially the due diligence they undertake – both in challenging their own work in developing offerings, and in relation to those with whom they invest or contract (eg suppliers) or otherwise support.
A key indicator as to the likely ‘direction of travel’ can be seen in the European Court of Auditors’ Special Report 22/2021: Sustainable finance of 20.09.21 (the “ECA Report”).
As explained in the ECA Report, In 2016, the [European Commission] set up the High-Level Expert Group on sustainable finance” (“HLEG”): 20 senior experts from civil society, the finance sector, academia and observers from European and international institutions to advise on (inter alia):
The ECA Report refers to the HLEG Final Report 2018 and others in stating that “public intervention will be needed to achieve the required level of sustainable investment”, including for the following reasons:
The market does not sufficiently price in negative side effects of [carbon] emissions ... and other negative environmental and social effects of unsustainable economic activities ... public and private [bodies] have little financial incentive to integrate ESG [S&R] considerations into their decisions ...”
The [current] sustainability-related disclosures in the private and public sector may lead to information asymmetry about the [true] sustainability ... of assets ... investors lack the reliable and comparable data they need to take informed decisions (see the 21.04.21 impact assessment on proposal for annual public reporting of non-financial information).”
... assessing and complying with sustainability standards may generate higher financial costs for sustainable activities ... In certain cases, sustainable projects will need public support to be financially viable ...”
In certain sectors and areas, investors willing to invest sustainably lack information on sustainable investment needs and available projects.
In some cases, the lack of available projects is due to insufficient capacity or know-how on the part of private project developers and public authorities. This is particularly an issue for sustainable infrastructure projects, which are complex to design, finance and implement but are necessary for a transition towards a low-carbon and climate resilient economy ...”
As per the ECA Report: “The EU taxonomy [is] a system for classifying the sustainability of economic activities based on scientific evidence ... designed primarily to be applied by issuers of securities and bonds, institutional investors, asset managers, and other financial market participants offering financial products in the EU as well as by central banks. Public authorities may use it to classify the sustainability of their activities.”
Various jurisdictions have developed or are in the process of developing their own taxonomies, including the UK.
Some might argue that having multiple taxonomies creates self-defeating risks:
There are already rules in place with an ‘ESG-positivity’ purpose, including in the UK financial services regime: LR 9.8.6 R (8) requires a UK incorporated listed company to -
The UK Financial Conduct Authority has also consulted on extending the above provisions to other issuers (see CP21/18) and in respect of asset managers, life insurers, and pension providers (CP 21/17). The latter proposes annual TCDF disclosures at:
The EU 'Sustainable Finance Disclosures Regulation' ("SFDR") introduces a range of disclosure requirements on financial services firms as to ESG S&R, including (in short) statements:
Disclosures and taxonomy are parts of a broader EU Action Plan for financing sustainable growth. This goes beyond climate risk management and includes the aim of fostering “sustainable corporate governance and attenuating short-termism in capital markets”. This would be a profound cultural change, which some might see as the ‘sine qua non’ for the achievement of genuine ESG S&R.
Read Part 1: Manifestation: ‘How green is your wash?’ >
This article was first published by Thomson Reuters.
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