“In your communication [on ESG], there should be some resemblance between what you say against what you deliver,” said Julie Pelcé, managing associate at CMS Luxembourg during an interview on 9 October 2023.
“[As a law firm] our primary role is to educate stakeholders in the financial sector that may be exposed to greenwashing risks,” noted Pelcé. Secondly, she mentioned that their role is to support clients that have been subject to greenwashing accusation.
What is greenwashing?
Various tentative definitions have circulated by activists, regulators whereas some are already part of several EU regulations (EU Taxonomy Regulation, MIFID II delegated act). The European Supervisory Authorities (EBA, EIOPA and Esma) came on 1 June with a
Aiming at adopting a common approach among the ESAs, greenwashing been defined “as 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.”
The risk of greenwashing harms investor confidence in sustainable finance, which is necessary for our common future and should therefore be reprimanded.
Pelcé understands that the project is at its infancy as the European Commission has mandated the ESAs to come up with a “definition which is currently not restrictive.” Stakeholders in the financial markets are rather invited to use it as a guidance. She thinks that a future regulation may use that definition.
Greenwashing: a fast-growing problem
According to the , the number of cases have skyrocketed to 206 in 2022 against 40 in 2018 in the EU financial sector. It covered a variety of topics from climate change, biodiversity and impact on landscape and on local communities.
Pelcé noted that the first visit by the regulators in the financial sector took place in the premises of asset managers. She also recalled some banks falsely claiming they were not investing in the oil sector.
“The risk of greenwashing harms investor confidence in sustainable finance, which is necessary for our common future and should therefore be reprimanded,” noted Pelcé.
Yet, the report on greenwashing mentioned that “very few cases” were brought to court and were eventually sanctioned.
Pelcé thinks that it may be related to the non-constrictive regimes and definitions. She also observed that the cases raised are coming mainly by the NGOs and the like which are “more inclined to damage firm’s reputation rather than going through the full legal proceeding leading up to a conviction.”
Pelcé commented that some behaviours have not been sanctioned by the regulators. They included exaggerations of “the causal link between an ESG metric and a real-world impact […] ambiguous impacts” and “inadequate measure of impact” whereby the financial institutions are cherry picking advantageous metrics.
The painless arm twisting
Pelcé presumed that discussions were held between the regulators and the financial institutions whereby the former required greater explanation from the latter. “In the absence of a targeted legal framework governing greenwashing in the financial sector, it is currently difficult for regulators and courts to sanction this behaviour.”
She thinks that there are not many incentives for stakeholders to change behaviour. However, she noted that regulators have heightened oversight. For instance, the Financial Sector Supervisory Commission (CSSF) has submitted a questionnaire in the recent weeks to asset managers to assess their understanding of greenwashing risks.
Market asking for more guidance
“Regulators should be more active in greater communication and education on all regulations and trends on sustainable investments […] and more guidance,” said Pelcé. Moreover, she noted that her clients have a high willingness to offer sustainable products, but many complained that very few tools were provided by the regulators. As a result, regulations are sometimes applied in a fashion not expected by regulators.
In the meantime…
As a good practice, Pelcé suggested to investees to implement automated checks to spot inconsistencies but also to provide extensive details on the investments such as the number of schools that were opened, for instance, in a social impact fund. Despite the potential mass of information to be collected, she believes that investees must be in position to provide extensive documentation. Delivering more may keep the regulator away.
The ESAs are expected to publish their final reports in May 2024 that will include recommendations and potential changes to the EU regulatory framework.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .