Greenwashing: A Quick Look at Some Key Regulations

Regulatory Compliance February 3, 2023

Are regulations working to combat corporate greenwashing?

Although there is no agreed upon definition of Greenwashing, it generally refers to the practice of making false or misleading environmental claims to market products or services to consumers who are becoming increasingly environmentally conscious.

With the growing interest in sustainability, it is becoming increasingly important to regulate greenwashing to ensure that companies are not taking advantage of consumers by making false or misleading claims. In fact, the European Supervisory Authorities (ESAs) recently closed a Call for Evidence on Greenwashing seeking to better understand the concept and examine some examples.

To combat greenwashing, several regulations have been introduced to set a common understanding of “sustainability,” to ensure that sustainability-related claims are as scientifically based as possible and ultimately to ensure capital is allocated to “sustainable” investments that end investors demand. Fund disclosure regimes such as the SFDR are one type of regulation which attempts to reduce greenwashing by mandating standardized disclosures from funds that want to promote themselves as being sustainable.

Taxonomies are another such tool, which aim to ensure that all financial market participants and investors have a common understanding of sustainability and linked terms. Corporate reporting rules, such as the EU’s Corporate Sustainability Reporting Directive (CSRD), seek to ensure that an agreed upon set of metrics are reported on in a consistent manner. We have observed, however, that the intended aim of these rules and their actual impact may not always be fully aligned.

The impact of regulation also depends on how rules interact and the combination of different regulations can help to avoid greenwashing. A good example is the recent changes to the MiFID II framework, to ensure fund distributors are asking end investors about their sustainability preferences as part of their suitability assessment. The framework brings together different regulatory concepts – SFDR Principal Adverse Impacts, Article 2(17) definition of Sustainable Investment and EU Taxonomy –  and facilitates a fact-based conversation about sustainability. As a concept, this combination is likely very powerful, yet in practice, whether or not it has been effective and whether end investors understand these concepts is unclear. 

A Few Key Regulatory Pushes to Combat Greenwashing, Focusing on Funds

The increasing interest in sustainability has led to the need for regulations to combat greenwashing, to ensure that consumers are not misled by false or misleading environmental claims. The combination of taxonomies, corporate reporting rules, and specific regulations for financial product disclosures and marketing can help to combat greenwashing and promote a more sustainable future.

We have observed many countries are trying to solve this problem and it is too soon to say whether or not this will work. In some cases, these rules can create more complexity, and we observe relatively little harmonization in rules within and across jurisdictions.

At Clarity AI, we are heavily involved with regulators on working to shape regulations as well as to provide commentary to regulators on regulations when they are made public but before they go live. We believe that the scale and scope about any one regulation, let alone the hundreds of global regulations in force or soon to be in force, can only be addressed and solved by advanced technology.

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