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KPMG’s ESG associate director David Postlethwaite and ESG associate manager Cillian Casey takes a look at what the crackdown on greenwashing in financial services means for the finance industry and the wider global economy
SUSTAINABILITY has become firmly embedded within the business landscape over the past several years, and with increasing speed since the 2015 Paris Climate Accords that triggered the global drive for net zero.
A leading cause of this is an increasing demand by the public to see their invested capital not just make an attractive financial return, but to make a positive impact on our planet and society.
Some of the growth in the sustainable finance sector comes from opportunity-seeking investors who are drawn to the potential that investing in climate change mitigation and the transition to net-zero may bring. More often than not, however, that same growth comes from a rebranding of old products with a new sustainable lens.
This highlights a key challenge when it comes to the rise in popularity and attractiveness of sustainable finance – the increasing risk of greenwashing.
The crackdown on greenwashing has started
Greenwashing is the use of dishonest practices used by some businesses to represent themselves as being more sustainable than they really are – either by giving a false impression, or by providing misleading information about the sustainability of a product or service.
This can be done as simply as omitting information that would highlight a lack of sustainability to give the perception of being sustainable, or as brazenly as making up or misrepresenting information altogether.
There is a clear incentive for businesses to brand themselves as being “green”. It enables them to attract or retain customers or investors who are increasingly conscious of sustainability issues.
But businesses must be aware of the risks associated with trading on sustainability claims that cannot be fully substantiated.
We are seeing increasing instances of legal action being taken against businesses, either by customers, investors, or campaign groups.
Recent litigation against a range of banks and corporates illustrates how costly such actions can be, whether they are successful or not.
There is also the reputational damage that comes with a greenwashing accusation. We are seeing it becoming ever more common that entities will find themselves on the wrong end of a boycott because of a greenwashing accusation – even if they are more sustainable than their competitors.
Greenwashing does not just damage the individual entity but the whole industry in question. In financial services, accusations of greenwashing can erode investor confidence, making it difficult to trust the sustainability claims of financial products.
The rise of anti-greenwashing regulation
Many jurisdictions – concerned that regulators lack the tools to tackle greenwashing and worried about whether investors are insufficiently protected – have moved to introduce specific new requirements around sustainability information.
In the UK, the FCA has brought in its anti-greenwashing rule as part of the Sustainability Disclosure Requirements. This rule – which aims to ensure sustainability-related claims are fair, clear and not misleading – applies to all communications relating to a financial product or service referring to sustainability (environmental or social) characteristics. The anti-greenwashing rules cover all FCA-authorised firms and come into force on 31 May 2024.
In many ways, the fight against greenwashing is being led by the EU, which has brought in several measures to tackle unsubstantiated green claims. The first of these is the Sustainable Finance Disclosure Regulations, which require funds marketed into the EU to make specific sustainability disclosures.
Alongside SFDR, the EU has enacted the EU Taxonomy Regulation. This is a framework that establishes economic activities which are classified as being environmentally sustainable, to reduce uncertainty around the sustainability claims.
What is the impact on the Channel Islands?
The economies of the Channel Islands are reliant on the finance industry, with sustainable finance being not just an opportunity to grow, but imperative to maintaining the health of our industry into the future as sustainable finance moves from niche to mainstream.
Any sort of greenwashing scandal could severely dent confidence in our industry and harm our attempts to establish ourselves as credible sustainable finance centres, in order to remain relevant to our clients.
Both the Guernsey and Jersey Financial Service Commissions have taken actions to mitigate this risk.
In Guernsey, the GFSC issued guidance in September 2022 for collective investment schemes to counter the risk of greenwashing. In Jersey, the JFSC made amendments to its Code of Practice and Jersey Private Fund Guide in July 2021, requiring additional disclosures relating to sustainable investment.
When it comes to greenwashing, regulators must walk a fine line. Regulations which are too onerous may turn off investment into precisely the activities that will support the transition to net zero. There is also a risk of green-hushing, whereby businesses are reluctant to communicate on sustainability for fear of attracting legal or reputational risk, leaving consumers and investors in the dark about the impact of their choices.
Nevertheless, the global trend is clear and we expect to see increased scrutiny of firms in the Channel Islands by both home regulators and those based in their key markets.
How we can help
KPMG professionals assist clients in fulfilling their purpose and achieving their ESG goals. We can work with you to enhance trust, mitigate risk and help unlock new value as you build a resilient business for a more sustainable future.
Find out more by contacting our ESG team or visiting kpmg.com/cds.
