Going after greenwashing

The development of investment funds with strong environment, social and governance (ESG) credentials has been touted as the next big thing for firms seeking to tap into trillions of investor dollars looking to have a climate and socially friendly impact.

We know that investor demand is growing rapidly for “ESG funds” that have a positive impact. PWC’s 2021 Global Investor Survey revealed 79% of investors considered ESG factors to be important to their investment decision making. PWC also estimates that ESG funds in European markets are likely to outnumber conventional funds by 2025.

This is potentially a positive development in the market but comes with a major qualifier: The impact of ESG funds and products depend upon the strength of regulatory and legal checks that keep firms from marketing those with little to no social or environmental affect.  

Already litigation by regulators is emerging against firms allegedly misleading retail consumers and shareholders about the ESG credentials of some investment products. The US Securities and Exchange Commission’s (SEC) Climate and ESG Task Force was formed in March 2021 to identify material gaps or misstatements in issuers’ ESG disclosures. It has already initiated charges against at least 15 entities to date. In the case against BNY Mellon for example, for issuing misleading statements and advisory about supposed “green” investments has settled for $1.5 million, and while low, sets important precedent.  

A significant challenge is that there is no clear market definition of a “green” or “ESG-compliant” investment. This appears to be leaving space for some firms to offer greenwashing products and is creating a regulatory gap keeping regulators from fully tackling misleading and fraudulent ESG claims. This alone poses serious risks for investors and the integrity of all ESG funds and products.

NY Mellon wrongly told investors over a period of three years that its products had passed an ESG quality review.

In May, the SEC proposed a rule setting out how ESG funds can be marketed and how to properly define the terms behind the labeling of such a fund. The efforts are aimed at standardizing disclosures for ESG funds and ensuring investors have reliable information, according to the Commission’s Chairman.

These types of regulatory building blocks are critical for this market to function, which also requires investor confidence.