The UK government aims to cut emissions and reach net-zero by 2050. The financial services sector forms a key part of the government’s strategy to achieve these goals, which will need a significant shift towards investment in sustainable projects and green technology.
Greenwashing - the process of conveying a false impression or providing misleading information about how a company's products are more environmentally sound - is at the forefront of conversations on sustainability in the financial services sector. Inaccurate information about environmental performance and sustainability may lead to misallocation of capital and overvaluation of assets.
These concerns are a key reason behind the roll-out of the Sustainability Disclosure Requirements (“SDR”) across the UK economy. These were outlined in the government’s October 2021 report Greening Finance: A Roadmap to Sustainable Investing. The SDR aims to create an integrated framework for decision-useful disclosures on sustainability across the economy. By using the same framework and metrics across the economy, it hopes to ensure a clear and direct link from investors, through the financial system to the businesses they are invested in and their relationship with the environment.
Much of the financial services sector is already subject to climate related disclosure requirements. New regulations that apply to large UK registered companies and LLPs come into force on 6 April 2022: these are the Companies (Strategic report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosers) Regulations. We previously reported on the introduction in January 2022 of the rules applicable to asset managers and owners and issuers of standard listed shares (see here). These complement the rules already in place for premium listed companies. The FCA has set out how it was going to enforce these requirements, alongside the FRC, in its Primary Market Bulletin 36.
FCA regulated firms have also been warned by the FCA that financial products with ESG or financially sustainable characteristics should be accurately disclosed and marketed. The FCA’s letter to CEOs and ESG investment fund managers set out guiding principles on how and why financial products with ESG or financially sustainable characteristics should be accurately disclosed and marketed. This noted that a number of applications had fallen below expectations. We highlighted this as one of our top 10 conduct risks of UK asset managers this year (see here).
The more that companies and/or investors rely on other companies’ disclosures to meet their own net-zero targets, the greater the risk that greenwashing will lead to liability. Ambition is required to meet the net-zero target by 2050 but disclosures, notably those which are climate-related, must be realistic, include sufficient detail, and be open about where there are shortcomings and uncertainties.
Claims could vary from an investor saying that if they knew the truth, they would have paid less or would not have invested at all, to more activist approaches seen elsewhere in the world. For example, in 2021, in Abrahamas v Family Trust, a court in Australia for the first time granted an investor access to confidential documents to check whether the defendant bank had complied with its own climate change policy in providing funding to oil and gas companies. The claim considered whether statements made by the bank about climate compliance constituted greenwashing. The US has also been active in greenwashing claims – this includes a large class action shareholder derivative complaint against the directors and officers of Exxon, which alleged intentionally misleading the public concerning global climate change and its connection to fossil fuel usage.
There will soon be more to consider on the issue of greenwashing. The UK government intends to publish a Green Taxonomy to provide a guide on what economic activities count as “green”. This follows the publication of the EU Green Taxonomy, which is already facing criticism following a decision earlier this year to include gas and nuclear energy in the taxonomy as “green” transition energies. The FCA has also published a consultation paper on sustainability disclosure requirements and investment labels. The objective appears to be to ensure that asset managers do not mislead investors with respect to the “greenness” of their investment products. The consultation closed on 7 January 2022. The FCA’s page says that the responses will inform the development of policy proposals for consultation in Q2 2022.
Financial services companies will need to remain focussed on regulatory changes in this area and are well advised to take steps to ensure their disclosures are accurate.
