Regulators step up scrutiny of investment industry ‘greenwashing’

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Even as scrutiny intensifies, investors pour hundreds of billions into green investments

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Financial watchdogs around the world are stepping up their scrutiny of potential “green laundering” in the investment industry amid growing concerns about the deployment of capital based on misleading claims.

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The flood of new private funds pledged to tackle climate change has prompted regulators to step up their standard-setting work to ensure that banks, insurers and asset managers provide clear information on the environmental credentials of investments they offer.

“We cannot allow this greenwashing to persist and risk the flow of much-needed capital to secure our future,” Nikhil Rathi, chief executive of the UK’s Financial Conduct Authority (FCA), said last week at the conference on the COP26 climate in Glasgow.

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In a discussion paper published last week, the UK regulator suggested that investment funds labeled as sustainable should feature “concise and accessible” language for consumers, as well as more detailed underlying information aimed primarily at investors. institutional.

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

Similar disclosure requirements were introduced by the European Union in March as part of the Sustainable Finance Disclosure Regulation. The FCA will seek responses to its proposals through a consultation process next year before issuing new rules.

The Swiss financial regulator also issued new guidelines earlier this month aimed at protecting fund investors from greenwashing.

Joining the push by UK, European and Swiss authorities to crack down on greenwashing is the work of the International Organization of Securities Commissions (IOSCO), a global standards body for the securities trade which aims to coordinate the development policies between national regulators.

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Greenwashing could harm the credibility of the green finance movement

Erik Thedean

“Greenwashing could damage the credibility of the green finance movement, jeopardizing efforts to limit the rise in global temperatures to 1.5°C. This is clearly a concern for ISOCO members,” said Erik Thedéen, head of the Swedish Financial Supervisory Authority and chair of IOSCO’s Sustainable Finance Task Force.

The fight against greenwashing is essential if securities regulators are to achieve their twin goals of protecting investors and ensuring the integrity of financial markets, he added.

However, only a minority of ISOCO members in 130 jurisdictions have specific rules covering sustainable investments. Many rely on their existing rules to control sustainable strategies, but IOSCO wants national regulators to go further.

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She proposed that national supervisors consider issuing new rules or guidance on sustainable investment products and also consider whether regulations covering the management of sustainability risks by investment firms are sufficiently stringent.

“It’s a clear signal to the asset management industry that it needs to have policies, practices and processes in place to avoid greenwashing,” Thedéen said.

This is a clear signal to the asset management industry that it needs to have policies, practices and processes in place to avoid greenwashing

Erik Thedean

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

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“There are very strong (commercial) incentives for asset managers to make claims in the competition to be ‘green’, but if they are making really misleading claims then the app is a tool that should be used. (by regulators),” Vingoe said.

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

Even as scrutiny intensifies, investors are pouring hundreds of billions of dollars into green investments. Global inflows into sustainable funds reached $477.4 billion in the first nine months of this year, well above the $366.6 billion raised in all of 2020, according to Morningstar, the fundraising provider. data.

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

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In the United States, the fight against greenwashing is complicated by the highly politicized nature of the climate change risk debate.

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

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SEC Chairman Gary Gensler told Congress in September that the US regulator was reviewing disclosures from the growing number of funds labeled as green or sustainable. He has signaled that he wants to ensure that sustainable funds provide enough information to allow investors to make informed choices, but his approach has drawn opposition from some Republicans.

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

“The United States is the largest capital market in the world, so it’s critical that there are clear regulatory guidelines on what ‘green’ and ‘sustainable’ mean to prevent greenwashing,” Eccles said.

© 2021 The Financial Times Ltd.

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