International action highlights regulatory risk over ESG ‘greenwashing’

7 June 2022

Overseas regulatory action has cast a spotlight on the increasing risks issuers face if they overstate environmental, social and governance (ESG) credentials. Recent moves by regulators in Europe and the US reveal that, as the popularity of including ESG principles in investment decisions surges, so too do the risks of facing regulatory or investor scrutiny for ‘greenwashing’ – misrepresenting the extent to which practices, products, or funds are environmentally sustainable or ethical.

Meanwhile a local survey showing strong investor interest in responsible investing highlights the likelihood such demand will fuel ESG claims in New Zealand – while at the same time pointing to growing investor concern about greenwashing.

What do New Zealand issuers need to know?
  • Investors are placing increasing weight on ESG information in investment decisions.
  • Regulators and investors are concerned that issuers will stretch the truth to either get a positive uplift through favourable ESG disclosure, or to avoid criticism associated with perceived ESG weakness.
  • Issuers should treat public disclosure about ESG credentials carefully. Ask yourself – how will we substantiate this statement when a regulator asks?  Keep a documented record of the basis for substantiation. 
International action on greenwashing

News about greenwashing issues in the financial sector has been prevalent recently, but three developments stand out as particularly noteworthy. 

  • Police raid Deutsche Bank and DWS’ Frankfurt offices

Last week around 50 police raided the Frankfurt offices of Deutsche Bank and DWS, Deutsche Bank's affiliated asset management firm, showing regulators are getting increasingly heavy-handed about ESG disclosure. The raid was part of an investigation by BaFin (the German securities regulator) into statements made in DWS’s 2020 annual report about the extent ESG criteria was a factor in investment decisions across its portfolio. DWS had said that more than half of its US$900 billion assets were invested using ESG criteria. Shortly after the raid, DWS’ chief executive officer resigned.

  • SEC cracking down on ESG disclosures

In late May, the US Securities and Exchange Commission (the SEC) proposed new disclosure and naming requirements for investment funds and advisers that market themselves as having an ESG focus. SEC Chair Gary Gensler said that “investors should be able to drill down to see what is under the hood” of firms’ stated ESG strategies. The SEC proposes to impose specific disclosure requirements for funds that use certain terms – like ‘ESG’, ‘sustainable’ or ‘low-carbon’.

The announcement of the proposed new rules emerged the same week as the SEC charged BNY Mellon for misstatements and omissions relating to ESG disclosures. BNY Mellon had said that its investments had undergone an ESG quality review, though it transpired that this wasn’t always the case. BNY Mellon agreed to pay a US$1.5 million penalty to settle the charges.

  • RIAA / Mindful Money report highlights demand for responsible investing

Closer to home, the Responsible Investment Association Australasia (RIAA) and Mindful Money released the results of a consumer survey showing a surging demand for responsible investing. From Values to Riches 2022: Charting consumer demand for responsible investing in Aotearoa New Zealand revealed that retail investors are overwhelmingly interested in responsible investing. Investors are looking for investment funds that align with their values and create positive impacts, while avoiding investments in companies that do harm.

Their media release also highlights growing concern among investors about greenwashing and the risk of being misled. Investors are questioning the accuracy of sustainability claims made by investment managers. According to Simon O’Connor, CEO at RIAA: “half the population are apprehensive that fund providers are greenwashing and making misleading claims, and are demanding that their providers can back up their claims”. 

Greenwashing rules in Aotearoa New Zealand

The Financial Markets Authority (FMA) offers relatively stark guidance on its website, stating “'Green-washing’ is illegal”

Part two of the Financial Markets Conduct Act 2013 (FMCA) requires 'fair dealing' in relation to financial products and services. This regime prohibits:

  • misleading or deceptive conduct, including conduct which is likely to mislead or deceive;
  • false or misleading representations; and
  • unsubstantiated representations.

An overstated or unsubstantiated statement on the ESG credentials of a financial product or service could breach the FMCA fair dealing regime. 

The FMA has released guidance emphasising the need to ensure investor confidence in ESG-related statements made by issuers – that is, that issuers are able to deliver what they promise. According to the FMA, where disclosures incorporate non-financial factors, issuers need to fully explain those features to avoid greenwashing, or selling their product on the basis of misleading labels and hype. Without adequate disclosure, it is difficult for investors to form their own views on the extent to which a product is sustainable and they are more likely to be misled.  

The FMA’s guidelines echo similar recommendations in the wider consumer context. For example, the Commerce Commission has issued guidance on environmental claims, including a warning that express environmental claims must be supported by a high level of substantiation involving reliable and credible scientific evidence. The Commission also warns that environmental claims 'by inference' (e.g. using imagery of forests or terms such as ‘green’ or ‘eco’) can be misleading. Similarly, the Advertising Standards Authority’s Code for Environmental Claims provides that any statements about aspirations of future environmental performance must be clear and able to be substantiated.

The FMA’s guidance includes similar themes. It is particularly focussed on statements about ESG objectives when marketing financial products and services (for example in product disclosure statements). However, issuers should assume that the FMA’s focus will extend to disclosures outside a securities offering context. NZX-listed issuers and financial institutions are responding to investor demand for greater detail on their ESG objectives by increasingly referring to ESG matters in their broader corporate communications, such as annual reports and market announcements. The fact that investors are attributing more-and-more weight to this information in their decision making will continue to result in heightened regulatory focus.

Issuers in New Zealand should treat the FMA’s clear guidance, coupled with the crack-downs by other global financial markets regulators, as a warning to make sure that ESG-related statements are able to be substantiated.

If you have any questions about the matters raised in this article please get in touch with the contacts listed or your usual Bell Gully advisor.

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.