Reviewing an increase in scrutiny and litigations on environmental and ESG claims

Jeroen Bos, Global Head of Equities, AXA Investment Managers

How have you seen scrutiny and litigation increase on environmental and ESG claims?

I have seen two distinct developments in the last decade or so. Firstly, we have seen a wave of regulatory scrutiny across the globe to create more transparency around Sustainability & ESG integration claims that asset managers make. This is to ensure asset managers actually do in practice what they claim they do and be transparent about how they do it. This was necessary as the interest in Sustainability and ESG integration clearly saw huge growth in the last decade, with most asset managers jumping on this bandwagon to benefit from this opportunity in Sustainable Investing. At the same time, the approach, quality, and consistency of ESG integration at the different asset managers clearly varied, triggering a need for more transparency as well as more scrutiny. In recent years this has led to some claims by asset managers being challenged by regulators or the media.

The second development of increased scrutiny and litigation was mostly seen in the US, where in recent years several, mostly Republican, states have introduced regulations to actually ensure that ESG or climate aspects are not integrated into investment-decision making or at least ensuring when integrating ESG it is not at the detriment of risk/return features of the portfolio. As a result of this, asset managers have been scrutinized in some states, and blacklists have been introduced.

What has caused the increase in green hushing throughout the financial sector, and how can financial institutions mitigate this?

In my view, there are two reasons for this. Firstly, with the wave of, sometimes complex and/or unclear, regulation being introduced across the globe, the risk of non-compliance for asset managers has, therefore, also increased. Not because necessarily asset managers are not abiding by the spirit of ESG integration but simply because regulation, when introduced, is not always crystal clear from the start with several subjective parts, including, for example, the definition of a Sustainable Investment under SFDR. In combination with a few larger asset managers being called out publicly and/or officially investigated by regulators, this has led to a more cautious approach for some asset managers around Sustainability and ESG integration.

Secondly, given the push-back on ESG and Sustainability from, for example, some US states like Texas and Kentucky, the regulatory and legal risks as well as business risks, have increased for some asset managers, also leading to a more cautious approach to Sustainability communications.

In my view, asset managers need to reflect on their beliefs, and their positioning and be clear about their stance around sustainability so clients can make the best-informed decision when selecting certain investment solutions. This should be the best protection against greenwashing and eliminate some of the reasons around greenhushing.

How can the green labeling law in Europe help reduce greenwashing?

Labeling can clearly help in creating clarity and transparency for investors about what a fund is trying to achieve and the minimum standards that it is abiding by. So, from that perspective, labeling can really help improve transparency and hence combat greenwashing. However, the wave of labels and regulatory categories also introduces the risk of creating confusion again. Labels such as LuxFlag, Towards Sustainability, ISR, and many others all have different requirements, and despite the introduction of SFDR, with a goal to harmonize standards across Europe, a range of European countries introduced local labels on top of this. Furthermore, regulatory categories, which in practice are also often used as some sort of labels by the market, are different when looking at SFDR in Europe, SDR in the UK or what the SEC is working on. So, despite labels helping to create more transparency for clients, we need to be mindful that too many different ones can create confusion again.

Do you believe newly introduced regulations help mitigate greenwashing and greenhushing?

In my view, combatting greenhushing can be done by making the regulation very clear and therefore limiting the risk of non-compliance due to disagreements around the interpretation of the regulation. Of course, this does not remove the other reason for greenhushing which is the anti-ESG movement in some regions. I also believe that regulation has clearly helped in combatting greenwashing, creating more transparency for clients, in particular in Europe in recent years.

What impact does a lack of clear greenwashing guidelines have on financial institutions?

Having clarity around what is considered greenwashing and what is not is, of course, very important to facilitate momentum. Without it, there will likely be a tendency for some asset managers to play it safe, and, therefore, potentially greenhush, as to minimize regulatory and reputational risks of being accused of greenwashing. And of course, there is subjectivity here around the definition of when an activity can be considered sustainable in practice. Take electric cars, they have clear benefits for the environment but also have components in their supply chain, including mining as well as end-of-life battery discussions, that could be considered less sustainable. The same holds true for wind turbines that again have clear benefits from a CO2 emission standpoint but can also have a negative impact on biodiversity. So, in practice sustainability is often actually not fully black and white. Still, to facilitate the further development of Sustainable Investing and Sustainable Finance, the regulators, as well as the sector, clearly have a role to play in ensuring a clear and transparent framework.

How can financial institutions prevent the risk of reputational damage from greenwashing?

In the end, to me, this is a simple one. In the area of communication, if you do what you say you do and provide transparency to your clients and the market around what you do then this is the best protection you can have. In addition, it is important to have strong governance, policies, and processes in place within your firm to ensure the proper checks and balances.

The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.