Greenwashing – the practice of exaggerating eco-friendly and sustainable credentials – is not a new phenomenon. It’s been going on for decades, and most of us are bombarded with brands’ environmental claims before we step out of the front door in the morning – from the recyclability of your almond milk carton to the number of tonnes of CO2 saved by taking the train rather than the car. ‘Sustainability’ is the new buzz word, so how do we know whether eco-claims are truly genuine?
The relatively recent demand for, and acceleration of flows into, ‘green’ or ESG funds over the last couple of years has made greenwashing of financial products a real problem for investors. Due to record demand, many funds are jumping on the ESG bandwagon and backers may not be investing in genuinely environmentally friendly funds, as they are led to believe.
If investors do discover that they have been mis-sold not-so-green investments, they may have a legal claim in misrepresentation. As with many claims, proving ‘loss’ can be a major hurdle i.e. returns on green funds may be lower than the actual returns, but there are other potential heads of damage.
Another hurdle likely to be faced by investors is the description of the funds given at the time of the investment, especially if they have not dug down into what they are actually investing in. The title environment, social and governance is potentially wide-ranging.
Further, investment in one environmental initiative does not necessarily mean that the investment is for the good of all initiatives, and can in some cases be harmful. It can also be very difficult to establish which activities are truly sustainable and which are not, particularly where investments appear to be in climate-friendly initiatives but do not in fact measurably contribute to the net zero goal.
In acknowledging the minefield of green fund eco-credentials, the EU’s Taxonomy Regulation and Sustainable Finance Disclosure Regulation (SFDR) have sought to bring some protection to investors. The Taxonomy Regulation provides a classification system relating to the environmental impact of economic activities, and the SFDR mandates certain disclosures that must be made for investments with an ESG focus. These will be built upon in the years to come.
The Financial Conduct Authority (FCA) and the Competition and Markets Authority (CMA) are also on to this issue. The FCA has recently issued a set of Guiding Principles in relation to ESG investments and written to chairs of authorised fund managers to set out the regulators’ expectations for ESG and sustainable investment funds, using a principles-based approach rather than the EU’s classification system. Further rules relating to disclosures will follow. A week ago, the CMA issued a Green Claims Code designed for businesses, which also uses a principles- based approach, to reduce the risk of the public being misled.
The UK has set up the Green Technical Advisory Group and is set to have its own Green Taxonomy by the end of 2022 (likely to be based on the EU’s Taxonomy Regulation).
Well, demand for green investments is not waiting around for regulation to catch up, and indeed it is crucial that it continues at pace if the planet is to achieve net zero climate goals. Investors would be well advised to be clear from the outset on what they are investing in beyond the name and description of the fund (e.g. by rigorously looking at green credentials, the indices tracked by the funds, and seeking evidence of objective scrutiny of sustainability initiatives and environmental claims).
They should also keep a detailed record of all disclosures and representations made pre-investment, as well as copies of all marketing material issued.
If an investor does believe investments have been mis-sold, we can advise on whether there has been an actionable misrepresentation and whether damages might be due.