Sustainable Investing is Here to Stay

Kari McCormick, Partner at Eversheds Sutherland, considers whether green hushing could shrink the universe for ESG investors.

The last few years has seen an explosion of investments being labelled green or sustainable. Many large companies announced ambitious net zero targets and the contribution they will make to becoming a net zero economy. But as these moves come under greater scrutiny and regulators and investors take action against greenwashing, could we see a knock-on effect of green hushing and bleaching cause a shrinking universe of options for ESG investors?

Sustainable growth?

It is not hard to see why offering sustainable investments is so appealing to companies. It is big business.

In policy statement PS23/16, ‘Sustainability Disclosure Requirements (SDR) and investment labels’, the Financial Conduct Authority (FCA) highlights that global assets under management in ESG-orientated funds is expected to increase to US$34 trillion by 2026. And FCA research has shown that more than 80% of consumers want their money to do good, as well as deliver a return.

With such demand for sustainable investing, regulators and lawmakers around the world have become increasingly concerned about the risk that some will take advantage by greenwashing.

In the last few months alone, we have seen the proposed EU Green Claims Directive (Directive), proposed updates to the EU’s Sustainable Finance Disclosure Regulation, SDR and its new anti-greenwashing rule in the UK, new naming rules by the US Securities and Exchange Commission and proposed by European Securities and Markets Authority, and measures introduced in Hong Kong.

Fertilising litigation

Even without such measures, regulators in jurisdictions such as the US and Australia have taken action against investment managers and companies for greenwashing, and challenges to sustainability claims are being pursued through the courts with increasing frequency.

In explaining the proposed guidance to its new anti-greenwashing rule the FCA said “Addressing greenwashing can improve consumer confidence and trust, and enhance the transparency, credibility and integrity of markets.

“If consumers trust the sustainability-related claims firms are making about their products and services, this increases confidence in markets and the flow of capital into products that can genuinely drive positive change.” 

Quietly green

Greenwashing can harm consumers, companies and the investment industry. Litigation and regulatory action can help to eradicate greenwashing and make good on losses suffered as result of such conduct. Removing the bad actors also helps the investment management industry more generally.

But could the fear of sanction or litigation for greenwashing cause unintended consequences?

If regulatory requirements concerning the making of sustainability claims are too stringent or the risk of making unintended errors is too great (for example through needing to predict future progress, or reliance on third party data or ratings), some businesses may decide not to label products that are sustainable, or give limited disclosure to investors on net zero targets or transition plans and progress.

This is where the investment and corporate world is confronted with green hushing and bleaching.

‘Green hushing’ is typically used to refer to a company downplaying or under reporting its green credentials or that of a product to avoid scrutiny in respect of sustainability practices, progress or product features.

‘Green bleaching’ appears to be used to describe a situation where a product that could perhaps be described as sustainable avoids doing so to avoid additional regulatory requirements that would be associated with such language.

From a risk and compliance point of view, this may seem a sensible approach; particularly for companies operating in jurisdictions that may have some hostility to promoting sustainability, such as the US, where some states have blacklisted banks and investment managers for their fossil fuel policies.

It is less helpful when it comes to some of the objectives of regulators and governments in relation to sustainability.

This includes transparency of reporting, enabling investors to make informed decisions through comparisons between products and companies, as well as promoting competition and innovation, and the allocation of capital to companies that can demonstrate they are contributing to the required transition to net zero.

The problem with silence

In this context, green hushing and green bleaching become problematic for those searching for sustainable investments in products and companies (or even less ambitious ‘responsible’ investments). If widely adopted, green hushing and bleaching could create a shrinking pool of suitable investments to choose from. And innovative companies committed to transitioning to net zero may not get the capital they need to achieve their plans.

However, there is reason for optimism. While concern about the increased risks from greenwashing claims is understandable (and it is no coincidence that we are seeing the emergence of ESG-badged litigation funders), there are a number of reasons that many companies will continue to exploit opportunities from sustainable products and to publish the progress they are making in respect of the sustainability of their own business.

These include the size of the opportunity, the potential for competitive advantage, the risks attached to failing to respond to customer and investor demands, pressure from shareholders and investors, and regulatory and legal obligations to make sustainability related disclosures.

So it looks like sustainable investing is here to stay.

This article was co-authored by Phil Spyropoulos, Partner at Eversheds Sutherland.

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