Clearer guidance on sustainability disclosure standards needed from regulators to avoid perpetuating greenwashing or risk “going to hell in a handbasket”.
Regulators need to work together to better define and standardise sustainable investment terminology in order to tackle greenwashing, according to experts at The Climate Risk & Green Finance Regulatory Forum today.
“The main issue we face in this space is the sloppy use of ESG terminology,” said Dr Rory Sullivan, Co-Founder and CEO at Chronos Sustainability and visiting professor in practice at the Grantham Research Institute on Climate Change at the London School of Economics.
As greenwashing is a “multifaceted issue requiring a number of measures”, more standardised terminology will allow for increased differentiation between ESG products that are “varying levels of green”, added Alessandro d’Eri, Senior Policy Officer at the European Securities and Markets Authority (ESMA).
The issue of inconsistent definitions is “particularly obvious in the appropriation of investment terms that are familiar to the investment community to try and describe what we’re doing on sustainability, social or environmental issues,” Sullivan said. For example, terminology such as ‘materiality’, which has a very clear and widely-adopted definition in financial markets, doesn’t so easily apply to fields such as climate risk, he explained.
Even though regulatory reforms such as the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR) are providing greater clarity around how providers should green-label ESG products, confusion remains, panellists said.
SFDR Level 1 compliance is required from March but SFDR Level 2 and the EU Taxonomy have been delayed to next year, placing industry in an uncomfortable transitory position.
“The EU Taxonomy is one of the few exceptions where there’s actually been a serious effort to more precisely define what we’re talking about when adopting technical language. If regulators don’t help sort this inconsistent use of ESG terminology out, we’re going to continue perpetuating greenwashing and we’re going to hell in a handbasket,” Sullivan said.
Standards bodies have been working to standardise their internal definitions of ESG terminology within their voluntary disclosure standards frameworks, as has been seen with the recent launch of a global sustainability standard prototype by the ‘group of five’ standards-setting bodies.
Stick versus carrot
Despite the evolving nature of the regulatory framework for sustainable investing, regulators must continue to hold financial participants accountable when labelling ESG products, in order to control and reduce greenwashing, d’Eri said.
Panellists agreed regulators should take a carrot-first approach, rather than going straight in with the stick.
“When there is a very deliberate attempt to mislead, there’s a very clear role for the stick. Most of the time, however, individuals are trying to do the right thing and it’s usually a simple case of misunderstanding what the regulator expects from them,” said Richard Monks, Director of Strategy for the Financial Conduct Authority (FCA).
“At ESMA, we are very aware of the transition phase we are all in. Regulators should be approaching the issue of greenwashing from a supervisory stance to better foster clarity on how to best define products as green,” d’Eri agreed.