Greenwashing: Scrutiny on sustainability claims increasing

For investors and companies alike, this isn't always an easy task. With evolving definitions, a lack of dependable data and various reporting standards, false claims are easily made and difficult to detect. Where the advent of the Sustainable Finance Disclosure Regulation (SFDR) along with the taxonomy regulation has been groundbreaking, challenges remain.

'Greenwashing', is a serious concern. This can pose risks for both companies and investors, as it can damage their reputation. False claims can erode trust and eventually undermine the transition towards a more sustainable economy.

In 2024, sustainability related claims will be reviewed by European and national supervisors. In a debate on European Consumer Protection Day recently organized by the ESAs in Madrid it became clear that greenwashing is an absolute top priority for the coming years. In that context the AFM published guidance on sustainability claims on October 4. The guidance lays down criteria for sustainability claims by financial market parties. In summary, sustainability claims need to be:

1. Correct, representative and actual;
2. Concrete and well substantiated;
3. Understandable, appropriate and findable.

With this guidance the AFM is proactively contributing to the work of the European Supervisory authorities (EBA, EIOPA and ESMA) that published a report on greenwashing in the financial sector in June. In this report greenwashing is defined as being: “a practice where sustainability-related statements, declarations, actions or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants.” They highlight that such claims can be spread intentionally or unintentionally.

The ESAs also find that the risk of greenwashing may relate to all key aspects of the sustainability profile of a product or an entity – from governance aspects to sustainability strategy, targets and metrics, or claims about impact. It is also acknowledged that there are challenges in the implementation such as the access to relevant and high quality data and the fast-moving regulatory framework. These challenges, however, should not keep financial parties from being as transparent and precise as possible in their sustainability claims.

The increased focus on greenwashing follows a broader trend of society and supervisors becoming more critical on sustainability claims. Already two years ago a group of nine law students from the Free University in Amsterdam started a legal procedure against Shell for its commercial on CO2 neutral driving, after which the commercial was banned. In 2022 asset manager DWS was charged with greenwashing by the US regulator SEC. The company portrayed itself as leader in ESG investing, however failed to implement certain ESG and money laundering policies in the way that they were billed to investors between 2018 and 2021. Last September it was announced that DWS is to pay $25 million to settle charges of SEC.

Last April Laura van Geest, the chair of the AFM, already announced increased supervision for green claims of funds banks and companies. She called for ESG investors to carefully do their homework.

As a long term investor we take our responsibility very seriously. We have started our homework for the new “leidraad”, checking the claims on our and our client Pensioenfonds Zorg en Welzijn, websites and making sure they are in line with the criteria.

Secondly, for everyone working on new claims: it is advised to use the three criteria above as a framework and to make sure we are not only clear on the goals, but also on the pathway and the ways that we measure success.

Ultimately, it is only with transparency that we build trust, and only with trust that we can redirect capital towards sustainable activities.