Hot spots of greenwashing risks to be monitored include credibility of (sufficiently ambitious) transition pathways and carbon credits used for offsetting emissions.
However, the credibility of e.g., Net Zero commitments can be enhanced if a financial institute applies established industry-standards for GHG accounting (e.g., GHG Protocol, Partnership for Carbon Accounting Financials (PCAF)) and Net Zero target setting (e.g., Science Based Targets initiative (SBTi)). Additionally, verification of data inputs (e.g., by independent firms) as well as validated Net Zero targets (e.g., by SBTi) will improve the robustness and credibility of climate targets and simultaneously reduce the risk of providing misleading information to stakeholders.
Greenwashing risks in asset management and financial services
For financial institutes, it is difficult to prove that they cause real world change unless they can clearly demonstrate the allocation of their invested capital to a defined purpose that is not further diluted. Consequently, it should be made clear to investors that a positive contribution or additionality can mainly be achieved via direct capital allocation (e.g., private equity), engagement with investee companies (e.g., public equity) and broad stewardship activities by influencing other stakeholders (e.g., policy makers).
Core greenwashing risks can be mitigated by clearly disclosing to investors the key difference between ESG approaches used for financial materiality considerations and ESG approaches that actually have (or clearly intend to have) a measurable impact on sustainability. It should be noted that the European definition of a sustainable investment is much stricter than the Swiss (and global) labelling of sustainable investment strategies; therefore, this automatically increases the reputational risks even if European standards do not directly apply.
The Disclosure Regulation (SFDR) contains ESG-specific transparency requirements to be disclosed to (potential) investors via various channels (i.e., website, pre-contractual documents (e.g., prospectus), periodic reports) and must be read together with additional environmental transparency requirements based on the EU Taxonomy Regulation. These transparency requirements contain disclosure obligations on an entity and product level and apply to entities manufacturing financial products (Financial Market Participants) or providing investment or insurance advice (Financial Advisors). Financial Market Participants include e.g., fund managers, insurance-based investment product providers, pension product providers and institutions providing portfolio management (discretionary mandates) so, broadly speaking, any type of asset manager also covered by the recently published Asset Management Association Switzerland (AMAS) self-regulation in Switzerland.
In investment advisory and portfolio management service processes, the product related ESG disclosures must be matched with sustainability preferences expressed by clients. The key challenge here is to enable a meaningful dialogue between clients and client advisors, both of whom are typically not experts on various ESG implementation approaches. Managing realistic client expectations is particularly challenging in situations where clients have ambitious ESG preferences and client advisors are hesitant to transparently disclose the limitations of their current product offering.
Financial institutes are challenged to set up robust product governance processes and critically assess their current sustainable product shelf. They are well advised to apply conservative definitions to terms like “sustainable”, “impact”, “carbon-reduction” and “Paris aligned” and ensure their consistent use, both internally and externally vis-à-vis clients.
Summary
In the Age of Greenwashing series, we will dive deeper into these product and service specific greenwashing topics by considering various EU regulations (CSRD, SFDR, EU Taxonomy Regulation, amendments to the Markets in Financial Instruments Directive (MiFID II) and Insurance Distribution Directive (IDD)) as well as RBI and the Swiss (self-)regulation recently published by FINMA, AMAS, Swiss Sustainable Finance (SSF) and the Swiss Bankers Association (SBA).
Acknowledgement: Many thanks to Heidi Gysi for her valuable contribution to this article.
