Latest developments on greenwash allegations

In this blog post, we explore the latest developments on greenwash in the financial and corporate space.

Climate change think tank InfluenceMap has analysed 130 climate-themed funds with USD$67 billion in assets under management and found that the majority (around 55%) of climate-themed funds are not aligned with the Paris Climate Agreement (see here). It has also analysed another 593 broad ESG-themed funds and found that 71% were not aligned with the Paris Agreement. InfluenceMap analysts say: “It’s very hard for investors to be able to accurately ascertain whether funds that are branded [as climate-focused] are actually Paris aligned or not” and that there is a lack of transparency about the wide spectrum of terms used to describe ESG, climate, and green funds.

The InfluenceMap report was published shortly after reports appeared in the press that German and US regulators are investigating an asset manager over claims made in respect of its ESG funds, leading some commentators to suggest that this is just the tip of the iceberg in terms of the potential for similar investigations against other asset managers (see here). With Morningstar reporting that total assets in sustainable funds reached USD$2.24tn at the end of June (up from less than $1tn at the end of the first quarter of 2020), it’s hardly surprising that questions are being raised as to what the many ESG fund labels really mean.

In the EU, much has been said already about the Taxonomy Regulation and Sustainable Finance Disclosure Regulation (SFDR), both of which are aimed at reducing the risk of greenwash in the EU investment space and increasing transparency about what “environmentally sustainable” means. See our Sustainable Finance Survival Guide for more information on these two regimes. 

The German finance regulator, BaFin, is also consulting on draft guidelines for how certain German investment funds must be structured so that they can be marketed as “sustainable” in Germany (see here).

In the UK, the Financial Conduct Authority (FCA) also recently published a set of anti-greenwash principles for UK funds, indicating that there will be much greater scrutiny of UK authorised funds making ESG-related claims and warned that applications for the authorisation of ESG-focused funds “often contain claims that do not bear scrutiny” (see here).

Meanwhile, in the US, the Chair of the Securities and Exchange Commission (SEC) has directed SEC staff to consider recommendations about whether fund managers should disclose the criteria and underlying data they use when marketing themselves as green/sustainable/low-carbon/etc, and whether the SEC might take a holistic look at the “Names Rule" (see here). 

But it’s not just asset managers and the wider financial sector that are facing increasing scrutiny over their ESG claims, corporates are too.

In the UK, environmental NGO ClientEarth has filed two complaints (see here and here) with the FCA against a food delivery company and a travel company, alleging failure to disclose climate risks to investors in breach of legal requirements under the Listing Rules and the Disclosure Guidance and Transparency Rules to disclose material risks to investors. In particular, ClientEarth claims that the companies’ disclosures risk giving investors a potentially misleading impression of how resilient the companies are to climate change. The UK Competition and Markets Authority (CMA) is also consulting on guidance on making green claims (see here) and the EU is also expected to publish a proposal on this later this year (see here).

This is all against a backdrop of the latest IPCC report, in which the world’s leading scientists have warned that climate change is getting worse, faster than previously thought, which means that pretty much all asset classes across the globe could be at risk (see here) and the IEA warning in its recent Net Zero by 2050 roadmap that we need a complete transformation of how we produce, transport and consume energy and calling for an immediate halt to all new oil & gas projects (see here).

It’s no wonder that the financial sector and corporates are coming under increasing pressure to explain what they are doing in terms of their climate and sustainable investment strategies and to demonstrate - in a transparent and robust way - that what they are doing is indeed what they claim they are doing and that their efforts are in line with the goals of the Paris Agreement. Failure to address these issues could lead to the risk of regulatory investigation (with resultant fines and damage to reputation), litigation in the courts and/or increased investor activism, as well as increasing challenges in terms of access to finance and insurance. 

Please contact your usual Linklaters contact if you would like to discuss any of these issues.