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Regulators step up scrutiny over investment industry ‘greenwashing’

Financial watchdogs across the world are sharpening their scrutiny of potential “greenwashing” in the investment industry on rising concerns that capital is getting deployed based on misleading claims.

The avalanche of new private money pledged towards tacking climate change has prompted regulators to step up their work on setting standards to ensure banks, insurers and asset managers provide clear disclosures on the environmental credentials of the investments they are pitching.

“We can’t let this greenwashing persist and risk the flow of much-needed capital to help secure our futures,” Nikhil Rathi, chief executive of the UK’s Financial Conduct Authority, said last week at the COP26 climate conference in Glasgow.

In a discussion document issued last week, the UK regulator suggested that investment funds labelled as sustainable should carry “concise and accessible” language for consumers alongside more detailed underlying disclosures aimed primarily at institutional investors.

The FCA also wants asset managers to provide more information about how environmental, social and governance factors are incorporated into their investment processes.

Similar disclosure requirements were introduced by the EU in March under the Sustainable Finance Disclosure Regulation. The FCA will invite responses to its proposals in a consultation process next year before publishing new rules.

Switzerland’s financial regulator also issued new guidance earlier this month aimed at protecting fund investors from greenwashing.

Joining the push by the UK, EU and Swiss authorities to clamp down on greenwashing is work by the International Organization of Securities Commissions (Iosco), a global standard setter for securities trading that aims to co-ordinate policy development among national regulators.

“Greenwashing could damage the credibility of the green finance movement, endangering the work to limit the rise in global temperatures to 1.5C. It is clearly a concern to Iosco’s members,” said Erik Thedéen, head of the Swedish Financial Supervisory Authority and chair of Iosco’s sustainable finance task force.

Tackling greenwashing is essential if securities regulators are to meet their twin objectives of protecting investors and ensuring the integrity of financial markets, he added.

However, only a minority of Iosco’s members across 130 jurisdictions have specific rules covering sustainable investments. Many rely on their existing rule books to police sustainable strategies but Iosco wants national regulators to go further.

It has proposed that national supervisors should consider issuing new rules or guidance covering sustainable investment products and also to examine whether the regulations covering the management of sustainability-related risks by investment companies are sufficiently rigorous.

“This is a clear signal to the asset management industry that they need to have policies, practices and processes to avoid greenwashing,” said Thedéen.

Iosco’s proposals, which are intended only as baseline, leave national regulators to decide whether any new rules should be mandatory, comply-or-explain or voluntary. This reflects the need for Iosco to achieve a consensus among its members but Grant Vingoe, head of the Ontario Securities Commission, said that regulators stand ready to act when they uncover “egregious failures or misleading statements” that constitute greenwashing.

“There are very strong [business] incentives for asset managers to make assertions in the competition to be ‘green” but if they issue truly misleading statements, then enforcement is a tool that should be used [by regulators],” said Vingoe.

In a sign of how financial watchdogs are closely examining the sector, it was revealed in August that German and US regulators had opened investigations into asset manager DWS following allegations about greenwashing made by its former global head of sustainability. The group said at the time that it “stands by” its disclosures.

Even as scrutiny mounts, investors are pouring hundreds of billions of dollars into green investments. Global inflows into sustainable funds reached $477.4bn in the first nine months of this year, well above the $366.6bn gathered over the whole of 2020, according to Morningstar, the data provider.

Inflows into sustainable funds sold in Europe account for 81.6 per cent of the overall growth so far this year while the US has contributed 11.8 per cent of the new business.

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In the US, the task of tackling greenwashing is complicated by the highly politicised nature of the debate over climate change risks.

Robert Eccles, visiting professor at the University of Oxford Saïd Business School, said that the Securities and Exchange Commission, the US regulator, could face legal threats if it issues even high level guidance on how investment managers should address the risks of climate change.

Gary Gensler, the SEC chair, told Congress in September that the US regulator was looking at the information provided by the growing number of funds which are branded as green or sustainable. Gensler signalled that he wants to ensure that sustainable funds provide sufficient disclosures to allow investors to make informed choices but his approach has triggered opposition from some Republicans.

John Kennedy, the Republican senator representing Louisiana, accused Gensler of imposing his “personal preferences” about climate change on investors, an allegation that the SEC chair denied.

“The US is the biggest capital market in the world so it is essential that there is clear regulatory guidance on the meaning of ‘green’ and ‘sustainable’ to prevent greenwashing,” says Eccles.

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