Securities supervisors worldwide are looking to coordinate and align their approaches to greenwashing in the investment industry, it became clear on Monday during a panel debate hosted by Iosco, the Madrid-based body that brings together securities regulators from across the world. The debate marked the start of Iosco’s seventh World Investor Week.
Mark Manning, member of Iosco’s sustainable finance task force and policy advisor at the UK’s FCA, told the panel that this coordinated approach on greenwashing will be “Iosco’s next milestone”, following its work on global sustainability reporting standards together with accounting body IFRS.
Last week’s decision by the Securities and Exchange Commission in the US to impose a 19 million dollar greenwashing fine on DWS Asset Management, part of Deutsche Bank, has demonstrated that supervisors are keen to crack down on investment firms misrepresenting their sustainability promises. The fine was alluded to in Monday’s debate. Several Iosco members, including those representing Italy and the UK, affirmed their concerns over how the investment industry is handling green and sustainable investors.
“If sustainable finance, investment education and investor protection should be encapsulated in one single quote, it’s ‘greenwashing’,” said Chiara Mosca (photo), commissioner at Italy’s markets regulator Consob. “If you really want to develop sustainable finance for a sustainable world, you need to set that in motion and to understand the complexity.”
‘Immense risk’
With the market for financial ESG products having ballooned in recent years from 500 million euro to more than 1.5 trillion euros, Mosca noted an “immense risk” that claims about ESG products are exaggerated, sometimes simply because it is difficult or ambiguous to communicate the sustainability goals that an investment pursues.
Another recent report, by Morningstar, also affirmed that interest in sustainable investment is surging but it’s doing very little to keep climate change in check. Morningstar spoke about about a “gloomy reality.”
For supervisors, this is not an easy task, said Mosca, who also serves as professor in corporate governance at Bocconi University in Milan. “These topics are all very new. We are still building a regulatory framework, and then the data is not crystal clear. There is no standardisation. Sustainability characteristics of investments can be unintended, and the supervisor is still building competence.”
Consob’s approach to greenwashing also includes investor education. “Investor education is a prerequisite for investor protection, and what we need to do is to close the ESG literacy gap,” said Mosca.
Informed product development
Getting the right flow of information out of companies that can be invested in is another area that needs attention, said FCA’s Manning. “This is an important prerequisite for the flow of information into financial services to informed product development,” he said. Iosco’s task force, furthermore, also provided guidance on sustainability related practices in asset management and work on ESG data.
Iosco’s next milestone in sustainable finance is around supervisory practices to address greenwashing. “This is the main deliverable in the coming period. Greenwashing is complex. Greenwashing can occur anywhere along the value chain. Therefore a number of different angles need to be considered by regulators and supervisors.”
“When thinking about greenwashing, it can relate to market conduct, to market culture. There needs to be supervisory cooperation. And, as Chiara mentioned, financial education, both for the investor and at the level of the industry,” Manning said.
‘Great opportunity for industry’
Speaking on behalf of the industry, Tanguy van de Werve, managing director of European asset management association Efama, said sustainable finance presents “a great opportunity for our industry, given the increased interest in and demand for ESG investment products and solutions.”
“Our advocacy efforts are therefore very much focused on ensuring that the regulatory framework being put in place enables us to play that role,” Van de Werve told the Iosco panel. He underlined that access to reliable and comparable data is essential to make investment decisions and hold companies to account. “We need it to be able to comply with our disclosure obligations and to avoid greenwashing allegations.”
Van de Werve welcomed the decision by the European Commission to review the Sustainable Finance Disclosure Regulation. “We stress the need to ensure that the regulatory framework does not become a tick-the-box exercise as the sustainability journey is not a binary black-or-white journey, but rather an evolving journey.”
Speaking on behalf of the WFE, the world federation of stock exchanges, CEO Nandini Sukumar underlined the need to better define retail investors. A recent industry discussion in Luxembourg also made clear that different definitions are being used in the sector, complicating product launches.
“In inclusion, retail is incredibly important,” Sukumar said. “When we have retail involved in markets, can you have truly inclusive financial markets? It becomes complex. What is retail? We have no definition of retail. The investing generation that comes now cares about ESG or about green products, about all the things we are speaking about.”
New generation of investors
“How do we foster this appetite from a new generation of investors who are keen to maximise the impact of their actions to invest for the better and do all the things that public markets have so long wanted to do?”
At the level of the OECD, the Paris-based organisation for economic cooperation and development, greenwashing will be discussed in a roundtable later this month.
Next to sustainable finance, this year’s edition of World Investor Week also will discuss investor resilience and crypto assets.The week “reinforces the value of robust financial education for investors, viewing it as a tool that pairs well with regulation to amplify investors’ knowledge and sound decision-making,” said Jean-Paul Servais, chair of the Iosco board and chair of Belgian supervisor FSMA.