Watchdogs Tackle the Blurry World of Greenwash

From questionable claims about bamboo-based products to climate funds that don’t quite seem like it, regulators have expanded their scrutiny of corporate claims to be green.

Financial watchdogs worldwide have targeted so-called “green laundering” as investing in accordance with environmental, social and governance (ESG) principles is increasing in popularity.

During penalties for the first three months of the year for markets, assets held in sustainable finance fell by 4 percent, according to research agency Morningstar. However, they proved more resilient than the broader U.S. market, where assets fell 6 percent during the quarter.

But investors may not get what they think they are paying for. While some markets have long had unambiguous rules on which eco-claims are acceptable – “organic” foods, for example, must meet very strict label criteria – the situation with ESG funds is less clear.

This has allowed some fund managers eager to invest cash to exaggerate their ESG credentials. Now, however, financial regulators are fighting.

In March, Joe Longo, chairman of the Australian Securities and Investment Commission (ASIC), said his agency was looking closely at fund managers offering green products to check that they were actually doing what they were saying.

Company boards, he said, also had to assess whether the environmental disclosures of their businesses and green product promotions accurately reflect corporate practices. Greenwashing, he added, was “very much in our view.”

Singapore is also exploring the overlap between practice and advertising. It develops ESG requirements covering names, prospectuses and disclosures of investment funds.

“We expect asset managers to‘ walk the talk ’and ensure that their sustainable commitments reflect real skills and practices on the ground,” Tan Keng Heng, executive director of the country’s Monetary Authority, said in January. “Green washing poses a real and current danger to our long-term collective efforts and ambitions in the long run.”

Other regulators are using existing rules to target green washing companies.

A rough recommendation from the UK Advertising Standards Authority, for example, recently offered a warning to HSBC about advertisements advertising its green achievements.

These claims – which were shown at bus stops last year – said the bank was financing customers’ zero-cost initiatives and planting a lot of trees to capture carbon. The ASA draft said people who see them would conclude that HSBC has made a “positive overall environmental contribution as a company” – while, in fact, it also finances companies with large carbon footprints.

Some guards have already taken action.

Last month, the Securities and Exchange Commission sued Brazilian miner Vale for allegedly making false and misleading claims ahead of the fatal collapse of the Brumadinho Dam in 2019. Vale, it said, deceived investors and the public with its ESG revelations. The company is challenging the SEC’s lawsuit in court.

Vale’s case may be a harbinger of a future. The SEC has set up a task force in its enforcement division to hunt down material breaches or misrepresentations in climate risk disclosures.

According to Christina Thomas, a former SEC associate who is now a partner at law firm Mayer Brown, the task force “not only focuses on public companies but also looks at investment advisors.” After Vale’s complaint, it is “certainly looking for more cases,” she added.

In particular, SEC President Gary Gensler said the regulator is working on a rule that will require funds with names containing terms such as “green” or “sustainable” to reveal how their investments meet those descriptions.

For ESG, “there is currently a wide range of what asset managers could mean in certain terms and what criteria they could use,” Gensler noted. “It’s easy to see if the milk is fat-free. It may be time to make it easier to tell if the fund really is what they say they are.”

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And the SEC is not the only Washington agency targeting greenwashing this year.

Last month, the Federal Trade Commission fined retailers Walmart and Kohl’s for allegedly marketing dozens of regional textile products as made of bamboo. Both companies have been accused of claiming that these “bamboo” fabrics were produced using environmentally friendly processes.

Across the Atlantic, meanwhile, the EU is working on standards for green bonds, both to encourage investment in sustainable projects and to reduce the risk of green laundering. In February, the European Securities and Markets Authority (ESMA) – which will play a key role in monitoring bonds – said tackling green laundering would be a priority for 2022-2024.

Since then, the International Securities Commission – a Madrid-based coalition of stockbrokers including the UK’s Financial Conduct Authority – has also pledged to combat green money laundering.

“We need everyone in the securities sector to work with us now to promote good practices and call for green laundering,” said Rodrigo Buenaventura, head of Spain’s security regulations, CNMV. “Building trust with high standards of conduct is critical to making investment products described as sustainable indeed.”

This story originally appeared in the May 23, 2022 issue of The Financial Times

Copyright The Financial Times Limited 2022

Reprinted with permission.

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