Financial watchdogs around the world are refining their examination of the potential for “greenwashing” in the investment industry amid growing concerns about deploying capital on the basis of misleading claims.
The avalanche of new private funds pledged to tackle climate change has prompted regulators to step up work on setting standards to ensure banks, insurers and asset managers provide clear information on environmental benchmarks. of the investments they initiate.
“We cannot let this greenwashing persist and risk the flow of capital essential to secure our future,” Nikhil Rathi, managing director of the UK’s Financial Conduct Authority, told COP26 climate conference last week. in Glasgow.
In a discussion document Released 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 intended primarily for institutional investors.
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 EU in March as part of the Sustainable Finance Disclosure Regulation. The FCA will invite responses to its proposals in a consultation process next year before releasing new rules.
The Swiss financial regulator has also issued new orientation earlier this month aimed to protect fund investors from greenwashing.
The International Organization of Securities Commissions (Iosco), an international standard-setting body for the securities industry that aims to coordinate policy development among national regulators, joins the push by UK, European and Swiss authorities to crack down on greenwashing.
“Greenwashing could damage the credibility of the green finance movement, jeopardizing work to limit the rise in global temperatures to 1.5 ° C. This is clearly a concern for Iosco members, ”said Erik Thedéen, head of the Swedish Financial Supervisory Authority and chairman of the Iosco Sustainable Finance Working Group.
Tackling 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 Iosco 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.
He proposed that national supervisors consider issuing new rules or guidance covering sustainable investment products and also consider whether regulations covering the management of sustainability risks by investment firms are sufficiently stringent.
“This is a clear signal to the asset management industry that it needs to have policies, practices and processes to avoid greenwashing,” Thedéen said.
Iosco’s proposals, which are meant only as a benchmark, leave national regulators to decide whether new rules should be mandatory, compliant or explicit or voluntary. This reflects the need for Iosco to achieve consensus among its members, but Grant Vingoe, chairman of the Ontario Securities Commission, said regulators stand ready to act when they discover “glaring failures or misleading statements ”which constitute greenwashing.
“There are very strong [business] incentives for asset managers to argue in competition that they are ‘green’, but if they are making truly misleading claims then the app is a tool that should be used [by regulators]”said Vingoe.
A sign that financial authorities are taking a close look at the industry, it was revealed in August that German and US regulators had opened investigations into asset manager DWS following allegations of greenwashing made by its former global head of durability. The group said at the time that it was “sticking” to its disclosures.
Even as scrutiny intensifies, investors are investing hundreds of billions of dollars in green investments. Global inflows to 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 provider of data.
Entries in sustainable funds sold in Europe account for 81.6 percent of overall growth so far this year, while the United States contributed 11.8 percent 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, visiting professor at Said Business School at the University of Oxford, said the Securities and Exchange Commission, the US regulator, could face legal threats if it even issues high-level guidance on how whose investment managers are expected to face the risks of climate change.
Gary Gensler, the chairman of the SEC, told Congress in September that the US regulator was reviewing the information provided by the growing number of funds classified as green or sustainable. Gensler has indicated that he wants to ensure that sustainable funds provide sufficient information to allow investors to make informed choices, but his approach has sparked 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 denied.
“The United States is the largest capital market in the world, so it is essential that there are clear regulatory guidelines on the meaning of ‘green’ and ‘sustainable’ to prevent greenwashing,” Eccles said.
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Investors need good data to navigate the ESG landscape / From Janine Hofer-Wittwer, Senior Product Manager, Financial Information, SIX, Zurich, Switzerland