Greenwashing refers to misleading claims made about the environmental benefits of products or practices, presenting an inaccurate image of environmental responsibility. Greenwashing has not only undermined past sustainability efforts, but also posed legal, reputational, and financial risks, including; the loss of investor and consumer trust; declines in stock prices; management liability claims for intentional misleading; and significant fines. According to recent research by RepRisk, an ESG data and research firm, the 2024 greenwashing landscape was mixed, with a cross-sector decrease in reported greenwashing cases but a rise in the severity of greenwashing cases and many repeat offenders. Key drivers of greenwashing claims have included accountability, compensation, prevention, adherence to policies and procedures, and compliance with climate-related legislation.
Greenwashing refers to misleading claims made about the environmental benefits of products or practices, presenting an inaccurate image of environmental responsibility.
Stakeholders, including investors, consumers, employees and regulators, have played a crucial role in identifying and combating greenwashing. NGOs contribute significantly through advocacy and legal actions, whilst consumers have been active in holding companies accountable through group litigation. Whistleblowers may also play a role in exposing deceptive practices. The EU Directive on the protection of whistleblowers, transposed into Luxembourg law in 2023, provides protections for individuals reporting illicit acts or omissions that are contrary to Luxembourg or EU law, regardless of sector and subject matter. The legislation covers employees, directors, contractors, and suppliers; provided, that the information is obtained in a professional context.
For the Luxembourg investment funds industry, the European Sustainable Finance Disclosure Regulation (the “SFDR”) requires the use of pre-contractual disclosure and reporting templates by in-scope financial products (including retail funds and alternative funds managed and marketed in the EU) that make certain sustainability-related statements to investors. The aim of the SFDR is to improve the transparency and comparability of sustainability-related disclosures and to combat greenwashing. The detailed disclosure requirements set out in the SFDR have been in force since 1 January 2023 and, since then, the alternative funds industry has noted many technical and practical challenges with its implementation. Work on designing SFDR 2.0 is now well underway and is a welcome opportunity to learn from the industry’s experience and to improve the communication of sustainability-related matters to investors and the quality of information received.
Although the responses to the initial SFDR consultation revealed broadly mixed industry views on the appropriate way to develop the SFDR framework, we are now starting to see more concrete proposals emerge following the European Supervisory Authorities’ joint opinion on the SFDR (published June 2024) and the Platform on Sustainable Finance’s (“PSF”) proposal on the categorisation of products under the SFDR (published December 2024). It is likely that the SFDR framework will be transformed from a disclosure-based regime into a labelling regime, with at least two categories focused on sustainability and the transition to net zero, and the possibility of a third “ESG collection” category. In order for the new labels to be meaningful, careful calibration of the features and requirements of each category will be crucial. For example, a proposed reliance on alignment with the EU Taxonomy under the “sustainable” category may mean that this category is little used in practice, as the EU Taxonomy on environmental matters is currently incomplete and the industry reports that the combination of the technical requirements and the challenges in obtaining relevant data make it difficult to apply. Full consumer and industry testing is necessary to ensure that SFDR 2.0 takes into account different fund structures and investment strategies, is proportionate, practical, and understandable to investors and fund managers.
For now, SFDR in its original form remains effective and fund managers must ensure that their financial products’ SFDR disclosures are accurate, comprehensive and well maintained, as investors and regulators are scrutinising SFDR disclosures and taking action where they consider disclosures are inconsistent or misleading.
For now, SFDR in its original form remains effective and fund managers must ensure that their financial products’ SFDR disclosures are accurate, comprehensive and well maintained
Alongside the evolution of the SFDR regime, fund managers targeting a global investor base are caught in a swiftly changing, acutely challenging geo-political environment, which makes it ever more important for fund managers to be able to properly disclose the features of their financial products’ investment strategies. The recent change in the U.S. Administration has come with outright animosity towards the “green transition”, with many major financial institutions sensing the pressure and withdrawing from their environmental commitments. As U.S. priorities appear to be shifting, the international business community’s engagement with environmental and social responsibility is clearly being tested.
Companies and stakeholders will want to adapt to the evolving political landscape. As a consequence thereof, we can expect to see less regulatory scrutiny in the U.S., and increased focus on performance, valuation and management (including in the EU and in Luxembourg).
Source: RepRisk, Special report - A turning tide in greenwashing? Exploring the first decline in six years, October 2024, available under .