Global Greenwashing Regulations: How the World Is Cracking Down on Misleading Sustainability Claims

What’s the cost of making misleading sustainability claims? It could be as much as US$19 million. That’s how much Deutsche Bank’s asset management firm DWS agreed to pay the United States Securities and Exchange Commission (SEC) in September 2023.¹The fine was part of an agreement to settle charges that the company engaged in greenwashing – the practice of making inaccurate statements regarding its environmental, social, and governance (ESG) investing practices. While the price tag may seem steep, such fines and penalties are set to become more common. Governments around the world continue to introduce regulations to address concerns that sustainable investment products may not be as green as they claim to be.

This increasing regulatory pressure is partly a response to the popularity of ESG investment products. The number of exchange-traded funds bearing a green label more than doubled in the past two years to almost 1,300, according to an early 2023 report.² Between 2016 and 2021, global assets under management in sustainable investing grew at a rate of 19% per year – well above the average of the overall asset management industry.³ That impressive growth has inevitably raised questions about the credibility of ESG claims. 

While many government, business, and investment leaders feel that the new regulatory frameworks are necessary to preserve trust and promote authentically sustainable investment products, some asset managers have found the new rules challenging. The state of regulation around greenwashing in the investment sector varies significantly by region. Additionally, the rapidly evolving guidance is often ambiguous, creating room for interpretation that can come back to haunt investment businesses. 

To help investment professionals avoid running afoul of the shifting regulatory landscape, this article shines a spotlight on some of the most important greenwashing laws and regulations to consider from around the world.

Greenwashing Regulations in Europe

The European Union has the most advanced regulatory environment, but the complexity of the various frameworks now in place has sewn confusion and complaints about compliance. Some of the most important regulations addressing greenwashing in the region include:

1. Sustainable Finance Disclosure Regulation (SFDR): The SFDR aims to combat greenwashing by addressing ambiguity around so-called sustainable product labels by implementing disclosure requirements for a broad range of ESG metrics at both entity and product levels. The goal of this rule is to confront greenwashing through the use of sustainability data, clear communications, firm-wide policies, ongoing reporting, and complaints handling.⁴ In particular, the SFDR establishes three categories of funds: Articles 6, 8, and 9.

   
   Article 6 funds are the least demanding, requiring transparency around the integration of sustainability risks into investment decisions. Article 8 funds are described as “light green” and require further sustainability considerations, requiring asset managers to disclose their principal adverse impacts (PAIs), which includes any consequences arising from investment decisions or guidance that leads to an unfavorable environmental or social impact. Article 9 funds, known as “dark green” funds, have the most stringent requirements. These funds have sustainable investment or reduced carbon emissions as an objective, and they invest in firms that incorporate good governance practices.

   Asset managers must take caution in applying these labels to their products. In April 2023, confusion over the language in the SFDR led asset managers to downgrade funds holding US$193 billion (EUR175 billion) of assets from Article 9 funds to Article 8 funds.⁵

2. EU Taxonomy: The EU Taxonomy is a framework that outlines six environmental objectives and four overarching conditions that an economic activity must meet to qualify as environmentally sustainable. The six environmental objectives of the EU Taxonomy are:
   
   
   1. Climate change mitigation
   2. Climate change adaptation
   3. The sustainable use and protection of water and marine resources
   4. The transition to a circular economy
   5. Pollution prevention and control
   6. The protection and restoration of biodiversity ecosystems⁶
   
   

   It is important for asset managers to note that the EU Taxonomy regulation does not mandate in-scope firms to make binding commitments for taxonomy-aligned investments within their financial products. They are only required to disclose to what degree their financial products commit to aligning with the EU Taxonomy. In attempting to provide clear definitions, the EU Taxonomy aims to help asset managers design credible green products that meet approved common standards

3. Corporate Sustainability Directive (CSRD): The CSRD applies to about 50,000 companies across the EU. It aims to strengthen reporting and disclosure requirements for climate and environmental performance – a firm-level requirement that will support efforts within the investment sector to counter misleading ESG claims by funds. The new rules will come into force in 2024. The CSRD will require firms to obtain mandatory third-party assurance on sustainability claims and quantify their environmental reporting. By introducing a single framework, the CSRD aims to bring greater comparability to ESG reporting.

4. Sustainability Disclosure Requirements (SDR): Introduced by the United Kingdom’s Financial Conduct Authority (FCA), the SDR attempts to tackle greenwashing by requiring all sustainability-related claims to be “clear, fair, and not misleading.”⁷ Asset managers operating in the U.K. may find the criteria challenging due to the broad and largely undefined sustainability lexicon. This is especially true for asset management firms that lack consistent in-house sustainability terminology to form an internal framework around. Adding further challenges, unclear and overly technical sustainability-related language will also come under scrutiny as part of the “Customer Understanding” Consumer Duty Outcome introduced by the FCA. Asset managers operating in the U.K. should consider setting up internal taxonomies with consistent definitions. They should also invest in training staff and ensure that staff are careful about the terminology they use in external-facing discussions and communications.

Emphasizing the need for asset managers to be mindful of greenwashing risks, the European Supervisory Authorities released a report in June 2023 highlighting some of the specific risks firms face. These include claims about sustainability impact and company engagement made by asset managers, litigation risk related to misleading ESG claims made by banks, and misleading product claims by pension and insurance providers.⁸

Greenwashing Regulations in North America

Compared to Europe, the U.S. has less advanced regulations addressing greenwashing. The SEC has taken steps towards regulating ESG-labeled investment products, but the rules remain a work in progress. Additionally, the organization has faced political backlash against a wide range of ESG-oriented corporate practices. In September 2023, the SEC updated the 20-year-old Names Rule, which aims to prevent fund names from misrepresenting the fund’s investments and risks. The rule expands the types of names that can be considered materially deceptive or misleading if a fund does not adopt a policy to invest at least 80% of its assets in the investment focus that the name suggests. 

Beyond regulations, the SEC was also responsible for the launch of the Climate and ESG Enforcement Task Force in 2021.⁹ The task force develops initiatives to proactively identify ESG-related misconduct, with its initial focus on identifying material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The task force also analyzes disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.¹⁰

Greenwashing Regulations in Asia Pacific

Within the Association of Southeast Asian Nations (ASEAN), 13 countries have developed taxonomies for sustainable finance practices, in addition to the regional sustainable finance taxonomy published by the ASEAN. Some notable jurisdictions to watch include:

1. Singapore: Singapore was one of the first countries in the region to introduce a taxonomy with the introduction of its Green Labelling Scheme (GLS) in 1992. The GLS aims to help consumers identify environmentally friendly products and promote sustainable consumption. More recently, the Monetary Authority of Singapore (MAS) proposed plans to align with International Sustainability Standards Board’s (ISSB) recently published standards. Under the standards, all listed issuers, business trusts, and real estate investment trusts will be mandated to provide climate reporting beginning in 2025. Non-listed companies with revenues of at least US$1 billion will also be required to comply with the reporting obligations starting in 2027.¹¹ Singapore is a particularly important player to watch as the country aims to brand itself as a global hub for sustainable business practices as part of the government’s Singapore Green Plan 2030.¹²

2. Malaysia: Malaysia has developed a Taskforce on Climate Related Financial Disclosures (TCFD) application guide to help address the poor coverage and quality of climate risk disclosures within the Malaysian financial services sector. For example, one study that assessed the Malaysian finance industry’s coverage of TCFD recommendations (i.e. whether there was information disclosed for each of the recommendations) found that companies in the industry scored an average of 20% for coverage of governance-related disclosures compared to the global industry average of 54%.¹³ Additionally, the Securities Commission has mandated that asset managers consider ESG risks in investment processes and active ownership and has published Guidelines on Sustainable and Responsible Investment Funds.¹⁴

3. Japan: Japan’s Financial Services Agency (FSA) has cracked down on greenwashing over the last year. The action was sparked partially by a US$9 billion fund managed by Mizuho financial, which failed to offer investors enough information about its environmental impact. In response, the FSA laid out new, more restrictive, rules on which funds can carry an ESG label. Under the guidelines, only funds that consider ESG as a “key factor” when choosing investments can be marketed using ESG-related terms such as “green” or “sustainable.”¹⁵

4. Hong Kong: In June 2021, the Hong Kong Securities and Futures Commission (SFC) took steps to make it easier for investors to find genuinely sustainable ESG funds and prevent misleading claims. The regulator issued a circular directed at management companies overseeing SFC-authorized unit trusts and mutual funds with ESG considerations as a primary focus. This directive mandates that collective investment scheme managers assess climate-related risks within their investment and risk management procedures, while also demanding disclosures regarding their methodologies for ESG-oriented funds. The SFC has established specific criteria for disclosures, investment strategies, and compliance standards for ESG funds. The requirements ultimately aim to help fund managers properly deal with climate-related risks and promote clear, comparable, and high-quality disclosure.¹⁶

5. China: Although the country’s financial supervision authorities at the national level have not issued specific rules to address greenwashing, the local China Banking and Insurance Regulatory Commission of Jiang Su office proposed guidance for developing green finance in 2021. The guidance “clearly indicate that the local government actively promotes banking and insurance institutions to improve the assessment system of green financial organizations, and supports banking financial institutions to establish green finance.”¹⁷ Additionally, in February 2022, the People’s Bank of China and other departments issued the 14th Five-Year Plan for the Development of Financial Standardization, which focuses on improving and unifying green financial standards.¹⁸

6. India: Trust for environmental claims is low in India, with just 29% of consumers saying they trust companies to tell the truth in their claims.¹⁹ Regulators have begun stepping up to address the issue. The Securities and Exchange Board of India issued a circular in February 2023 outlining criteria for green debt securities to follow to avoid greenwashing. The Reserve Bank of India is also looking to address greenwashing risks in financial services. In April 2023, the organization announced rules enabling banks, non-banking and housing finance companies to raise money by floating green deposits, which allow lenders to raise funds from environmentally conscious investors. The new rules ensure funds raised through these green deposits are subject to an annual, independent third-party verification process.²⁰

The Greenwashing Challenge: From Ignorance to Accountability

From creating taxonomies and labeling rules to suing over dubious sustainability claims, governments around the world are starting to fight back against financial institutions and asset management firms that are seen as misleading their clients.  The result is a regulatory environment that can be complex and confusing at times. With each country adopting different frameworks and reporting standards, it’s an environment that will only become more challenging to navigate with time. But, as we have seen with Deutsche Bank’s asset management firm DWS, ignoring those regulations can come at a serious cost.

Asset managers must remain vigilant and be well-versed in the latest regulations to ensure that their investment products and marketing materials accurately represent their ESG credentials. Failure to do so can lead to reputational damage, legal consequences, and potential financial losses. To remain on the right side of compliance, asset managers should consider several key factors:

1. Regulatory Frameworks: Understand the specific anti-greenwashing regulations and standards that apply in the jurisdictions where you operate.
2. Transparency: Be transparent about your investment strategies and the criteria used to select sustainable assets. Be clear about how you define and measure ESG factors and the impact of these factors on investment decisions.
3. Data Quality: Use reliable and standardized ESG data sources. In instances where data is not available, this may require using estimated data.
4. Third-Party Verification: Obtaining third-party verification or certifications for your ESG products and strategies can add credibility to your products and demonstrates a commitment to transparency.
5. Internal Compliance: Establish internal compliance procedures and governance structures to ensure that your investment strategies adhere to both regulatory standards and internal policies.
6. Documentation: Maintain thorough records of your ESG assessments, investment decisions and compliance efforts. This documentation can be crucial in demonstrating your due diligence and commitment to regulatory compliance.

Interested in learning more about how your firm can address greenwashing risks? Read our latest guide, Seeing Through the Green: A Guide to Greenwashing Risks for Asset Managers, featuring strategic insights from investment professionals to help you spot greenwashing and develop genuine sustainable investment products.

References 

1. U.S Securities and Exchange Commission. 2023. “Deutsche Bank Subsidiary DWS to Pay $25 Million for Anti-Money Laundering Violations and Misstatements Regarding ESG Investments.” September 25, 2023. https://www.sec.gov/news/press-release/2023-194

2. Flood, C. 2023. “Investors Warned of ‘Greenwashing’ Risk as ESG-Labelled Funds Double.” April 24, 2023. Financial Times.  https://www.ft.com/content/79772342-d260-4dd5-b943-5e75bc27878c

3. Dumitrescu, Adriana; Gil-Bazo, Javier; Zhou, Feng. 2022. Defining Greenwashing. Financial Management Association. October 21, 2022. https://www.fma.org/assets/docs/Consortium2023/GreenwashingO.pdf

4. Eurosif (nd). Sustainable Finance Disclosure Regulation. https://www.eurosif.org/policies/sfdr/

5. Jones, H. 2023. “EU Moves to Clarify ‘Sustainable’ Investments After Fund Downgrades.” April 14, 2023. Reuters. https://www.reuters.com/markets/europe/eu-moves-clarify-sustainable-investments-after-fund-downgrades-2023-04-14

6. Morningstar Sustainalytics. 2022. “The EU Action Plan on Financing Sustainable Growth: Twelve Essential Questions Answered for Investors.” September 2022. https://connect.sustainalytics.com/inv-ebook-eu-action-plan-on-financingsustainable-growth

7. UK Financial Conduct Authority.  CP22/20: Sustainability Disclosure Requirements (SDR) and Investment Labels. March 29, 2023. https://www.fca.org.uk/publications/consultation-papers/cp22-20-sustainability-disclosure-requirements-sdr-investment-labels

8. Segal, M. 2023. “EU Regulators Find Growing Greenwashing Risk for Banks, Asset Managers.” June 5, 2023. ESG Today. https://www.esgtoday.com/eu-regulators-find-growing-greenwashing-risk-for-banks-asset-managers/

9. U.S. Securities and Exchange Commission. 2021. “SEC Announces Enforcement Task Force Focused on Climate and ESG Issues.” March 4, 2021. https://www.sec.gov/news/press-release/2021-42

10. Ibid.

11. Speer, S. 2023. “ Singapore Regulators Propose ISSB-Aligned Climate Reporting.” July 17, 2023. Green Central Banking. https://greencentralbanking.com/2023/07/17/singapore-issb-aligned-climate-reporting/

12. Singapore Green Plan. 2023. “A City of Green Possibilities.” https://www.greenplan.gov.sg/. Accessed on October 20^, 2023.

13. Malaysia Joint Committee on Climate Change. 2022. Task Force on Climate-Related Financial Disclosures (TCFD) Application Guide for Malaysian Financial Institutions. June 29, 2022. https://www.bnm.gov.my/documents/20124/3770663/TCFD_Application_Guide.pdf   

14. Securities Commission Malaysia. 2023. Guidelines on Sustainable and Responsible Investment Funds. February 17, 2023. https://www.sc.com.my/api/documentms/download.ashx?id=1863d35d-9a34-4ccc-bf61-9f942b520b44

15. Lee, S., Umekawa, T., Uranaka, T. 2023. “Funds That Inflate Green Credentials Face Strict New Rules in Japan.” February 9, 2023. The Japan Times. https://www.japantimes.co.jp/news/2023/02/09/business/economy-business/greenwashing-esg-portfolios/

16. Seneca ESG. 2023. “Crackdown on Greenwashing By Regulators Has Begun.” September 20, 2023. https://senecaesg.com/insights/crackdown-on-greenwashing-by-regulators-has-begun/

17. Bay, C., Liang, I., Hawkins, K., Uhera, S., Smith, D. 2023. “Greenwashing: Exploring the Risks of Misleading Environmental Marketing in China, Canada, France, Singapore and the UK.” September 25, 2023. Gowling WLG. https://gowlingwlg.com/en/insights-resources/articles/2023/the-regulation-of-greenwashing/

18. Ibid.

19. The Global Governance Initiative. 2023. “The Problem of Greenwashing in India: Policy Review.” June 11, 2023.  https://www.theggi.org/post/the-problem-of-greenwashing-in-india

20. Times of India. 2023. “RBI Steps In To Prevent ‘Greenwashing’.” April 12, 2023. Times of India. https://timesofindia.indiatimes.com/city/mumbai/rbi-steps-in-to-prevent-greenwashing/articleshow/99421360.cms?from=mdr