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.
Firms are exposed to increasing risks of enforcement action where their ESG-related statements may be inaccurate or misleading.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.
Other claims could target behavioural change, including derivative actions by shareholders for alleged breaches by directors of their duties.
Greenwashing is also a focus for the Competition and Markets Authority.In a recent example, ClientEarth (a Shell shareholder), announced that it was seeking to bring a derivative claim against Shell’s Board for alleged failures to implement an appropriate climate strategy.
More generally, greenwashing claims in the UK may be facilitated by the increasing availability of third party litigation funding and the rise of multi-party (or class) actions.
FTA: Do advisers need to guard against regulatory action or litigation in relation to ESG/greenwashing? Can you describe a scenario in which such action might be taken against an advice firm?
WC: UK financial advisers must comply with professional rules and standards set and enforced by the FCA.
These include requirements to act with due care, skill and diligence, avoid recommending unsuitable investments, maintain effective systems and controls, and communicate information to customers which is clear, fair and not misleading.
Some or all of these rules (and/or others) could potentially be engaged in a greenwashing scenario, for example where an advisory firm has made inaccurate claims about its ESG expertise or performance, failed to undertake appropriate due diligence in relation to investment products it recommends, and communicated inaccurate information to customers about the ESG performance of those products.
Related claims by customers are also possible, e.g. in respect of the breaches described above (where actionable by private persons) and/or for negligent advice.
FTA: How could financial advisers who sell ESG investment products be impacted by regulatory action or litigation against other firms in the supply chain, for instance asset managers?
WC: As noted above, advisers need to comply with professional rules and standards, as well as duties owed to their customers.
If an adviser recommended investment products which were shown (following regulatory action or litigation against other firms in the supply chain) to be affected by greenwashing, this could potentially lead to customer complaints and/or regulatory enquiries.
Conceivably, where such complaints or enquiries indicated possible failures on the adviser’s part - for example, regarding the quality of due diligence, advice and/or assessment of suitability for the customer - the adviser could be exposed to the risks of regulatory penalties, claims by customers, and/or reputational damage.
FTA: What do advisers need to be aware of when it comes to ESG regulation?
WC: Financial advisers should have regard to their existing professional rules and standards, and consider how these could be engaged in the context of ESG investments and concerns around greenwashing.
Advisers should also maintain awareness of the developing ESG regulatory framework, particularly in relation to requirements for product- and entity-level disclosures.
Advisers should remain familiar with the developing EU framework (where relevant).In addition, they should recognise the prospect of new rules applying directly to them: in November 2021, the FCA stated that it was exploring “specific sustainability-related requirements” for advisers and would develop proposals in due course.
Finally, recognising that many UK firms are subject to EU rules in respect of their EU business, advisers should remain familiar with the developing EU framework (where relevant).
FTA: What can/should advisers do to guard against potential litigation and regulatory action?
WC: Overall, advisers should maintain a high level of awareness of the diverse potential risks which could arise in the context of ESG disclosures and greenwashing, including those outlined above.
Some practical considerations include:
1. Reviewing compliance with existing professional standards and duties to customers through the lens of ESG investing, including in respect of communications with customers, research and due diligence, and suitability considerations.
2. Providing relevant training to staff, establishing ESG-specific policies and procedures, and monitoring compliance on an ongoing basis.
3. Keeping abreast of the proliferating regulatory framework for ESG disclosures.
William Charles is disputes partner at international law firm Milbank LLP
