Environmental, social and governance investing is gaining in popularity every day, but there are potential pitfalls for the unwary investor.
William Charles, disputes partner at international law firm Milbank LLP, talks to FTAdviser In Focus about the problems with greenwashing in financial services, the potential for regulatory action to combat it, and what advisers should do to protect themselves against litigation in this area.
FTAdviser: How widespread is greenwashing in financial services?
William Charles: It is difficult to say exactly how prevalent greenwashing is in financial services, but it is clear that concerns are widespread and growing, both among regulators and private investors.
The Financial Conduct Authority has identified combatting greenwashing as a key part of its ESG strategy, and its Director of ESG recently expressed concerns about the amount of greenwashing in the market.
For private investors, greenwashing is typically among the most frequently cited concerns in available studies.
FTA: How could greenwashing lead to regulatory enforcement against financial services firms?
WC: ESG matters are high on the regulatory agenda.
The regulators’ determination to challenge greenwashing, combined with the expanding regulatory framework, means that firms are exposed to increasing risks of enforcement action where their ESG-related statements may be inaccurate or misleading.
New rules requiring climate-related disclosures (at entity level and product level) by certain authorised asset managers (among others) were published by the FCA in December 2021.
Meanwhile, existing rules (for example, requiring fund managers to ensure communications with customers are clear, fair and not misleading) could also be applied in challenging greenwashing.
In addition, requirements are likely to proliferate in the future: in November 2021, the FCA published a discussion paper on expanding required disclosures to other sustainability factors (supported by a UK Green Taxonomy), further to proposals in HM Treasury’s Greening Finance Roadmap.
Greenwashing is also a focus for the Competition and Markets Authority, which published a ‘Green Claims Code’ in September 2021 for businesses making environmental claims on goods and services.
Consumer protection and advertising standards rules may also be engaged, for example where advertisements by firms concerning their ESG performance are deemed misleading.
FTA: What is the threat of litigation against such firms?
WC: Litigation in the UK concerning greenwashing could take a number of different forms.
Investors could bring statutory claims under the Financial Services and Markets Act 2000 concerning alleged misleading ESG-related statements by firms.
In very brief outline, these claims provide possible remedies for investors in listed firms who have suffered losses as a consequence of false or misleading statements in (or omissions from) a prospectus or listing particulars (section 90), or other company announcements (section 90A).
Claims for negligent misstatement or negligent misrepresentation might also be available. All such claims are likely to raise (to varying degrees) important issues around reliance, causation and loss, which claimants will need to surmount.