ICMA publish paper on Market integrity and greenwashing risks in sustainable finance

On 10 October 2023, the International Capital Market Association (ICMA) released a paper on market integrity and greenwashing risks in sustainable finance. The paper is a follow-up to ICMA's earlier response to the European Supervisory Authorities (ESAs) call for evidence on greenwashing and further develops ICMA's analysis of greenwashing concerns in sustainable finance from a global perspective.

Key areas addressed in the paper include:

• questioning the need for exhaustive definitions of 'greenwashing' and the sufficiency of existing laws to address misrepresentation in sustainable finance;
   
• the limited prevalence of greenwashing in the GSS use-of-proceeds bond market and with further analysis with respect to concerns in the SLB bond market (though noting ICMA research evidenced a declining trend in reported controversies and further shows the number of SLB issuers obtaining SBTi approval for their SLB targets reached 70% in Q2 2023) and fund naming;
   
• the importance of identifying actionable areas of concern for both sustainable bonds and fund products (which the paper categorises in more detail) and noting the effectiveness of ICMA's Principles in mitigating these concerns, backed by international endorsement; and
   
• the relevance of existing regulatory initiatives, taxonomies, and the role of future corporate reporting.

The paper concludes with the below recommendations for policy makers and regulators:

1. Concentrate on actionable areas of concern in sustainable finance: the actual areas of concern in sustainable finance such as lack of ambition in the sustainable bond market or misleading labelling of sustainable funds are generally well understood by both market participants and regulators. They are also actionable. Conversely, catch-all definitions of greenwashing risk paralysing market participants due to both reputational and litigation fears.
    
2. Help improve the availability of data and analysis on market integrity in relation to these areas: there is insufficient data and analysis available on market integrity in both the sustainable bond and fund market which needs to be remedied by efforts from both the official sector and the market. This will be easier to quantify by focusing on the areas of concern identified in this paper rather than broader definitions.
    
3. Reference existing legislation where enforcement may be needed: existing laws and financial regulation contain effective safeguards against misrepresentation and of course fraud. Neither are novel concerns for regulators. Examples of enforcement and litigation on this basis are already under way.
    
4. Implement current regulatory initiatives with a focus on international interoperability and usability: there are multiple regulatory initiatives from major jurisdictions targeting the key areas of concern in sustainable finance. The priority should be (i) to promote their international operability in a global market, and (ii) to address identified usability issues.
    
5. Continue to leverage the positive contribution of market best practice: sustainable finance, and especially the sustainable bond market with ICMA's Principles, is perhaps unique in the degree of available voluntary best practice. Regulators and policy makers can further leverage the best practice the market has developed when they consider that voluntary guidance may be insufficient to support its integrity.

The paper is here.

ICMA's press release is here.