Sustainability claims need to be fair, clear, not misleading

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Financial supervisors across Europe are actively providing industry guidance on sustainability claims that financial firms attach to their products. EU-level guidance calls for communications with investors that is fair, clear and not misleading. In Luxembourg, CSSF has outlined its expectations of investment fund managers in a thematic review published in August. Its Dutch counterpart AFM since then has published its own guidelines. As knowledge experts of Investment Officer, Tom Loonen, Lous Vervuurt and Jan Saalfrank at law firm Pinsent Masons review the Dutch guidelines.

The Dutch Authority for the Financial Markets (AFM) published its new “Guidelines on Sustainability Claims” on 4 October 2023. The guidelines apply to all financial institutions and pension providers making sustainability claims. Therewith, the guidelines do also impact investment fund managers.

The AFM emphasises that sustainability is one of its supervisory priorities. The focus of this guideline is on promotion of transparency regarding the impact that the various market participants have on their surroundings. The guidelines contain principles, practical examples and explanatory notes. As the space for this article is limited, we will show one example for each principle.

Guidelines from the AFM qualify as written policy statements. This means that the AFM provides direction and clarity to market participants. Nevertheless, guidelines cannot be considered as law or regulations. This means that market participants are not legally bound to this guideline and should be considered as an advice to them.

Three principles

The guidelines distinguish three principles for sustainability claims:

Claims from the product or market participant must be accurate, representative and up-to-date and not contradictory.
Specific and substantiated: claims must be backed up by relevant facts and cogent explanation. If these are absence, no claim should or could be made.
Understandable, appropriate and easy to find: use understandable language for claims, don’t use difficult terms and claims made must have a proper explanation as to complex concepts. Relevant information must be easy to find and readers’ expectations should be kept in mind.

These three principles as set forth above are not stand-alone but must be regarded as to complement each other.

Sources for information requirements

The AFM supervises adherence by information requirements that apply in in Dutch law, which, for investment fund managers in the Netherlands, come from various sources: the Dutch Act on the financial supervision, the Cross-Border Distribution of Funds Regulation and the Dutch Unfair Commercial Practices Act. In the latter “misleading commercial practice” is defined as “the act of giving factually incorrect or misleading information or the omission or failure to provide essential information in a clear or comprehensible manner”.

Princple 1 example: Accurate and representative

The example relates to information under Sustainable Finance Disclosure Regulation (SFDR) which is a transparency regulation and SFDR classifications should not be presented as a kind of substantiation for sustainability and should not be used to promote products. The AFM notes that SFDRs meaning is not apparent for many readers of information and therefore these can be easily misled. One of the examples the AFM mentions is the use of an SFDR classification as “a seal of approval”.

Furthermore classifications are used as a marketing tool “we invest under SFDR Article 9 label”, whereby investment fund providers present themselves as being “sustainable”. Real sustainability claims cannot be substantiated by the reference to an SFDR classification but should be a result of the underlying characteristics of the investment product. SFDR classifications are not sustainability labels.

Good practice as to principle 1: Representative pictures of sustainable impact: a clear view of the impact of efforts on sustainability even if these are relatively low.

Principle 2 example: Specific and substantiated

The example shows a statement that sustainability is considered important by noting that part of the investments have been made according to a sustainable investment policy. With this, a reader cannot assess how large the impact is and there is no reference to the contents of the sustainable investment policy.

Good practice as to principle 2: Providing of concrete figures. Ratio to total invested assets and outline of broader context which will enable the reader to get a clear understanding of to which extent the market participant has formed sustainability goals.

Principle 3 example: Understandable, appropriate

This example relates to the use of vague and complex language such as references to “strategic policy”, “responsible investment” without explaining what these terms actually mean and how a sustainable investment policy is established. Sustainability terms (e.g. “ESG”, “Green”, “Social”) should only be used accompanied by a solid explanation.

Furthermore, submission of too lengthy documents should be avoided. Readers should be in the position to relatively easily get to the core of the message.

Good practice as to principle 3: Make a summary of a sustainable investment policy available on the website in the form of a two-page document containing all relevant information. Reference can be made to a more comprehensive document but at first, a good accessibility must be safeguarded.

Conclusion

The guidelines of the AFM are clear in their purpose: no foggy language but use of concise and adequate information! Furthermore, fund managers should not use labels on topics where these don’t exist at all. Sure, it may be tempting from a marketing point of view, in the race to sustainability, to blow up “green performance”. Even though the announced new, tighter rules for sustainability claims on a European Union level have not been presented yet, it is clear that, with these new guidelines, in any case the Dutch supervisor will keep a close eye on exaggeration and vagueness.

Tom Loonen is professor of financial law at Vrije Universiteit Amsterdam and special counsel Pinsent Masons Netherlands, while Jan Saalfrank is partner investment funds at Pinsent Masons Luxembourg. Lous Vervuurt is an attorney at Pinsent Masons. She advises on financial regulation and anti-money laundering compliance. The law firm is an Investment Officer knowledge partner.