A lack of engagement with key stakeholders and timing of greenwashing investigation among criticisms levelled at European Supervisory Authorities.
DWS whistle-blower Desiree Fixler has criticised European Supervisory Authorities (ESAs) for not reaching out to her regarding their investigation into greenwashing in sustainable investment, while other consultation responses focused on ESG rating agencies, harmonisation, and definitional nuances of greenwashing.
In November, the ESAs – the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) – launched a drive to collate stakeholder views on the main drivers of greenwashing and practical examples of potential greenwashing practices.
This is part of a mandate issued last year to the ESAs by the European Commission which will inform a decision on whether further supervisory or enforceable action is needed to reduce greenwashing risk in the sustainable investment space.
In a personal response, Fixler – who said the main drivers of greenwashing included weak corporate governance and culture, and lack of incentives tied to sustainability – expressed disappointment that no one from the ESAs had reached out or engaged with her on the DWS incident or on greenwashing in general.
In August 2021, Fixler made headlines when she alleged that DWS had misled investors by claiming that more than half of the group’s US$900 billion in assets were invested using ESG criteria, noting that there was no tracking system in place that could accurately calculate the proportion of ESG integrated assets.
It led to probes by the US Securities and Exchange Commission (SEC) and Germany’s financial regulator BaFin – both are currently still ongoing.
Enforcement needed to tackle greenwashing
Fixler said on LinkedIn that these actions “did more to tackle greenwashing than the entirety of SFDR [EU Sustainable Financial Disclosure Regulation].” She argues in her consultation response that regulation won’t tackle greenwashing without a greater emphasis on enforcement.
This view is shared by a group of ESG experts, including famed lawyer Paul Watchman and former UNEP Finance Initiative Head Paul Clements-Hunt, who recommend the adoption of a more punitive regulatory regime for greenwashing offences and a feasibility study into the potential of stand-alone greenwashing legislation.
To tackle greenwashing, Fixler argued that disclosure requirements should apply to ESG rating agencies such as MSCI and Sustainalytics as well as assessment organisations including the UN Principles for Responsible Investment (PRI) and CDP. There must be clear communication that these organisations’ ratings are based on voluntary disclosure which in many cases have not been verified or measured, she said.
“Clients and shareholders of asset managers can be misled into thinking an asset manager’s PRI ‘A+’ means an advanced ESG capability score,” Fixler said. “The public needs to know the PRI’s A+ was based on voluntary statements that may or may not be truthful.”
Investors are assessed on their responsible investment reporting in a private report from the PRI. The CDP says its scores “are not a comprehensive metric of a company’s level of sustainability or ‘green-ness’, but indicate the level of action reported by the company to assess and manage its environmental impacts during the reporting year”.
Like Fixler, the European Fund and Asset Management Association (EFAMA) was critical of the ESAs’ approach to its call for evidence, noting that there was not sufficient time to provide more developed responses.
“Consulting with our industry expert was made harder than necessary due to the CfE [call for evidence] being carried out at the end of the year and the holiday season,” it said.
The comment period was 10 weeks, with Christmas and New Year in between.
‘Deliberate’ and ‘unintentional’ greenwashing
EFAMA also focused on ESG ratings agencies, suggesting that they could be liable in some cases of greenwashing, as asset managers relied on their data to build their ESG strategies.
The association said that, while it didn’t weaken asset managers’ requirement to do due diligence, such processes should not be held fully responsible for the omissions and errors of others, such as ESG ratings agencies.
Brussels-based sustainable investment trade association Eurosif also noted that while financial institutions were often the “spreader” of greenwashing, they depended on sustainability-related data from investee companies or ESG data providers which still lacked reliability and granularity. EU rules to improve this, such as European Sustainability Reporting Standards (ESRS), which underpin the Corporate Sustainability Reporting Directive, would take several years to implement, it noted.
For these reasons, Eurosif advised the use of a different term to refer to unintentionally misleading or erroneous sustainability-related claims, which could be caused by unreliable data or information from third-parties.
This issue was highlighted by a number of organisations in response to the ESAs, which said their needed to be a distinction made between ‘deliberate’ and ‘unintentional’ greenwashing. Another theme among market participants was a call for harmonisation of measures to tackle greenwashing.
EFAMA, for example, noted that there were already several sustainable finance regulations such as SFDR and CSRD to tackle greenwashing.
“New guidance around greenwashing should be embedded into the existing frameworks, and there should be a consistent and harmonised approach on both the EU level and the international level,” it said.
Elsewhere, Paris-based NGO Reclaim Finance said the ESAs should include financial institutions’ net-zero claims in its investigation of greenwashing, noting they could draw on existing UN recommendations that any net zero pledge include the ceasing of support for fossil fuel development and a progressive phase-out oil, gas and coal.