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Recent years have seen a proliferation of funds which describe themselves as sustainable or environmentally conscious. This increase has been boosted by a fast-growing sustainable finance regulatory framework in the EU and UK, alongside increasing investor demand.
Against this backdrop, regulators have become increasingly concerned about the risk of “greenwashing” – a situation where a firm makes misleading or exaggerated claims about the environmental benefit of its products or services. Conventionally seen as a conduct risk, i.e., an act of wilful misconduct through mis-selling or misrepresentation, greenwashing or the perception of greenwashing might also occur inadvertently. A lack of standardised and complete sustainability data and a new landscape of unfamiliar sustainability related terminology could result in end-investors not understanding funds’ objectives and strategies.
As regulators continually release new sustainability related regulations to tackle this concern, asset managers need to stay alert to the risk of greenwashing and our paper sets out the points along a customer’s asset management journey where the risk of greenwashing might occur and how asset managers can stay one step ahead of that risk. This includes specific actions for Boards, as well as different teams at asset management firms, including portfolio managers and control functions (such as compliance, risk and audit).
The paper discusses upcoming sustainable finance regulation in the EU and UK, as well as existing regulations that are relevant to greenwashing. Some of the regulatory initiatives discussed in the context of greenwashing are the EU Sustainable Finance Disclosure Regulation (SFDR), the FCA Sustainability Disclosures Requirement (SDR) and the FCA’s Dear AFM Chair letter on transparency.