A very real worry, as survey evidence appears to suggest, is that unless regulators and others stamp the practice out, it could seriously set back the push for "greener" energy.

A new UK anti-greenwashing rule took force last Friday, showing that the regulatory regime will expand across economic sectors to cover groups such as banks and wealth managers.

The measures, from the Financial Conduct Authority, will crack down on a practice that threatens to foster cynicism about ESG investing.

There appears to be a credibility problem about green investing. In November last year, a survey from PricewaterhouseCoopers found that more than nine in 10 investors believe that corporate reporting on sustainability performance contains unsupported claims.  

Over the past 20 years, commentary and interest in ESG investing has increased, accelerating after the 2008 financial crisis as firms saw these ideas as a means of reconnecting with clients and repairing their brand images.

Firms within and outside the financial sector have been called out for misleading adverts in recent years. In June last year, for example, the UK’s Advertising Standards Authority upheld a ruling against Hyundai Motor UK over the charging rates of one of its electric vehicle models. In a June 2021 case, meanwhile, the ASA also upheld a complaint about the carmaker’s claim in an advert about “A car so beautifully clean, it purifies the air as it goes.” 

Within finance, in October 2022 the ASA banned two HSBC adverts for greenwashing. 

(This news service has a programme – Wealth For Good Awards – designed to highlight what wealth managers are doing to ensure that environmental, social and governance considerations are imbedded into their practices. To find out more about the awards and the 2024 programme, click on this link.)

In the US, the Securities and Exchange Commission (SEC) has acted against the practice. The European Securities and Markets Authority stated in February 2022 that it was exploring the topic. In November 2021, to give another case, the Monetary Authority of Singapore reportedly issued regulations and put in place technologies to crack down on greenwashing. From 2022, banks in Singapore must conduct stress tests which include climate-related scenarios while making required disclosures to ensure that they are managing risks related to climate change and other environmental concerns.

FCA statement
The UK regulator said results from its latest Financial Lives survey showed that 81 per cent of adults surveyed would like their investments to do some good as well as provide a financial return. 

The FCA said it is consulting on extending the requirements for portfolio managers to show how sustainable investments are labelled and explained, making consumer choice easier. 

The proposed labelling and Sustainability Disclosure Requirements (SDR) for portfolio managers mostly mirror those introduced for asset managers in November 2023. They include: product labels to help consumers understand what their money is being used for naming and marketing requirements so that products can only be described as having positive outcomes on the environment and/or society when those claims can be backed up.

"Confirming the new anti-greenwashing guidance and our proposals to extend the Sustainability Disclosure Requirements and investment labels regime are important milestones that maintain the UK’s place at the forefront of sustainable investment,” Sacha Sadan, director of environmental, social and governance, FCA, said in a statement about the measures.

Caroline Greenwell, partner at London law firm Charles Russell Speechlys, said that until recently, most greenwashing allegations featured consumer brands and their advertising and marketing. But the FCA’s action means that this will change, she said. 

“The new anti-greenwashing rule and guidance means that the risk of greenwashing no longer just concerns consumer brands, but now all FCA-regulated firms who make claims as to the sustainability characteristics of a product or service which they offer,” she said. 

“This could change the game on the scope of greenwashing risk and, depending on how active and draconian the FCA’s enforcement of their rule is, we are likely to see a significant uptick in regulation and even litigation arising out of investment firms’ sustainability claims,” Greenwell added.

The issue is fraught with political and other considerations. For example, in July 2022 European Union legislators voted to include nuclear power and natural gas in the EU’s list of investments deemed sustainable.

Cynicism prevention
Law firm Pennington Manches Cooper, to give an example of warnings about the practice, said in a paper (21 September 2022): “Greenwashing can also create reputational issues which undermine the overall trust in sustainable finance and its effectiveness in the battle against climate change at a time when there is more pressure than ever on financial institutions and all other businesses to implement sustainable, environmental and social changes in their various business interactions.”

Last November, a senior figure at international multi-family office AITi Tiedemann Global said that he welcomed debate about challenges such as “greenwashing” and uneven data for ESG ideas, because it reminded investors that they must fully understand what they own.