Greenwashing
Content
The concept of greenwashing
According to the common understanding of the three ESAs, greenwashing is a practice in which sustainability-related statements, declarations, actions or communications do not clearly or adequately reflect the underlying sustainability profile of a company, financial product or service. Greenwashing can be misleading for consumers, investors or other market participants. Greenwashing claims on sustainability are misleading regardless of whether they are made or disseminated intentionally or unintentionally. Greenwashing does not imply that investors are actually harmed. Moreover, the occurrence of greenwashing is independent of whether the companies or products in question fall under the EU legal framework.
Accordingly, the German Financial Supervisory Authoriy (Bundesanstalt für Finanzdienstleisungsaufsicht – BaFin) speaks of greenwashing when financial products or companies are presented as more sustainable than they actually are. According to BaFin, greenwashing in this sense occurs when regulated companies use practices in the sale of products or in the provision of financial services that do not clearly and honestly disclose their actual sustainability profile. Investors can thus be misled, and their investments may not have the desired ESG impact. BaFin’s aim is to protect investors by preventing misleading marketing of financial products.
Manifestations of greenwashing
Greenwashing can, for example, occur in the following forms:
- Concealment: emphasising a single environmentally friendly factor while concealing environmentally damaging factors
- Lack of evidence: further information on – or scientific evidence for – environmental claims is not provided
- Unfounded arguments, illogical reasoning: supporting “green projects”, offsetting your “personal carbon footprint”, “Your investment has an impact on the following sustainability criteria...”
- Vague expressions, euphemistic design: “measurable” ecological impact, “green” colour scheme
- Fake labels, irrelevant statements: labels based on self-declarations of companies or simply intended to symbolise sustainability
- Manipulation of processes: such as manipulation of inspections or tests carried out by means of software
- Misuse official certifications: in particular, voluntary official certifications (e.g. EMAS, ISO 14001) by which companies try to create the impression that their products or processes are more environmentally friendly than the certification actually demonstrates
Sanctions (supervisory law)
Germany
According to its own statement, BaFin makes full use of the supervisory tools at its disposal in order to prevent greenwashing.
In product and market supervision, BaFin monitors compliance with transparency and disclosure requirements on ESG impacts (in particular, the SFDR (Disclosure Regulation) and Articles 5 to 7 of the Taxonomy Regulation (Taxonomy Regulation)).
In its conduct of business supervision, BaFin pays particular attention to companies’ implementation of the distribution requirements under the delegated regulations on the Insurance Distribution Directive (IDD) and the second European Markets in Financial Instruments Directive (MiFID II).
As part of its financial reporting enforcement, BaFin is to monitor compliance with the CSRD transparency requirements. BaFin’s solvency supervision (Pillars 1 and 2 of the frameworks for banks and insurers) addresses the appropriate management of transition and physical risks and the corresponding transparent disclosure.
- Liability and sanction mechanisms in the funds sector - The Disclosure Regulation itself does not contain any sanction provisions. According to Art. 21 of the Taxonomy Regulation, the national competent authorities pursuant to Art. 14 of the Disclosure Regulation, – i.e., in Germany, BaFin – should lay down rules on measures and penalties in case of infringements that are effective, proportionate and dissuasive. To do so, however, BaFin requires a specific legal basis (cf. section 6 – Draft Green Claims Directive).
- Administrative offence - A breach of the transparency obligations applicable under the Disclosure Regulation could constitute an offence pursuant to section 5 para. 6 German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB). According to section 340 para. 2 nos. 24, 38 KAGB, a breach of the transparency obligations in the annual report or prospectus qualifies as an administrative offence.
- Prohibition of distribution - Moreover, distribution could even be prohibited if key investor information under section 307 KAGB, the annual report or the sales prospectus do not contain the information required pursuant to the Disclosure Regulation.
- Prospectus liability - Apart from regulatory sanctions, civil law sanctions may be imposed. If relevant information is not included in the prospectus or the key investor information, or if such information is incorrect, prospectus liability pursuant to section 306 para. 1 KAGB may apply.
USA
According to press reports, DWS has to pay a fine of 19 million dollars according to an agreement reached with the US Securities and Exchange Commission (SEC) because DWS had advertised that sustainability was part of its “DNA” without paying sufficient attention to the corresponding criteria in its “investment processes”.
Criminal law consequences
According to press reports, the public prosecutor’s office in Frankfurt has initiated preliminary investigations for investment fraud against Asoka Wöhrmann, former Chairman of the DWS Executive Board (section 264a German Criminal Code (Strafgesetzbuch – StGB)).
Reputational damage
While sanctions against financial companies for greenwashing can result in fines, already the mere public accusation of misleading green claims – even if unjustified – may result in considerable reputational damage. It is to be expected that the frequency of legal actions by consumers or associations and the pressure exerted by activists on financial companies will increase in future. As ESG reporting requirements are enhanced, demands on risk management in the financial sector in order to prevent reputational damage and loss of revenue or earnings are also growing. Financial organisations are therefore forced to implement and improve, respectively, procedures for identification, prevention and management of greenwashing risks.
Draft Green Claims Directive
According to the European Commission’s proposal for a directive on environmental claims, which was adopted on 22 March 2023 (Green Claims Directive), member states should ensure in the future that traders carry out an assessment to substantiate explicit environmental claims and avoid misleading claims.
This assessment shall:
- specify the scope of the environmental claim in relation to the traders’ products or activities;
- rely on widely recognised scientific evidence, use accurate information and take into account relevant international standards;
- demonstrate that environmental impacts, environmental aspects or environmental performance that are subject to the claim are significant as regards the life-cycle of the entire product or activity;
- where a claim is made on environmental performance, take into account all environmental aspects or environmental impacts that are significant to assessing the environmental performance;
- demonstrate that the claim complies with legal requirements;
- provide information on whether the product or trader performs significantly better regarding environmental aspects than what is common practice;
- identify whether a positive achievement leads to significant worsening of another impact;
- require greenhouse gas offsets to be reported in a transparent manner; and
- include accurate primary or secondary information.
The competent authorities that monitor compliance with the proposal in the internal market should have the power to investigate and enforce the relevant requirements, access relevant information relating to an infringement, require access to relevant information to determine whether an infringement has occurred, initiate investigations or proceedings, require traders to take remedial action and measures to bring an infringement to an end, issue injunctions where appropriate and impose penalties.
When determining the type and level of penalties to be imposed by the member states, due regard must be given to the nature, gravity, extent and duration of the infringement, its intentional or negligent character, the financial strength of the person held responsible, the economic benefits derived from the infringement and any previous infringements or other aggravating factors. Penalties imposed on the trader for the same infringement in other member states have to be taken into account.
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