The Taiwan Banker

As ESG investing has been mainstreamed, and corporate board agendas have increasingly considered related issues, identifying and preventing ‘greenwashing’ has become a focus of regulators. In order to prevent greenwashed products from flooding financial markets, the EU has issued three regulations in succession. Although the UK has left the EU, it has spared no efforts in eradicating greenwashing. Taiwan should learn from this and formulate Taiwanese versions of relevant regulations. Three major UK regulators have separate responsibilities for ESG matters Currently in the UK, there is no single regulatory agency responsible for ESG enforcement. Rather, the Competition and Markets Authority (CMA), Advertising Standards Authority (ASA), and Financial Conduct Authority (FCA) jointly promote anti-greenwashing regulation and correct market disruption resulting from information asymmetries between the buy- and sell-side. If a company is suspected of greenwashing, any of these three agencies have the right to open an investigation. In order to ensure that companies understand how to comply with the Consumer Protection Law when making sustainability claims, the CMA published the Green Claims Code in 2021, which applies to all companies making sustainability claims, including upstream and downstream in the supply chain. The Code includes six key principles: businesses should be truthful and accurate about their products, services, brands and activities; all product messaging and credentials should be clear and unambiguous for the consumer; businesses should not hide or omit important information that could prevent a consumer from making an informed decision; any products compared must be intended for the same purpose or meet the same needs; businesses should consider the total impact of a product or service from beginning to end; and all claims must be substantiated with robust, credible and up to date evidence. Corporate stakeholders must ensure that their companies act in accordance with the Code. The new Digital Markets, Competition and Consumers (DMCC) Bill stipulates that companies who violate the above law may face civil penalties, and those with serious violations may be fined up to 10% of global turnover. The legislation is currently under review and is expected to take effect before the end of 2024. In order to combat greenwashing in the financial services industry, the FCA’s new anti-greenwashing rules will apply to all companies regulated by the FCA and require their products and services to make sustainability claims. Under the new rules, companies will be required to ensure that their sustainability statements are fair and verifiable, the information must be clear, presented in an understandable manner, and not omit or hide important information, and that other products or service sustainability projects are fair, not misleading, and comparable. Greenwashing within financial products A couple of practical cases illustrate financial products which may involve greenwashing. One is misleading sustainability information on fund investment targets. For example, an asset management company may advertise that its fund does not invest in “coal” companies, but the terms of the prospectus show that it still invests in other companies involved in production, sales and distribution of coal. If it cannot prove that the income of these companies related to fossil fuels is below a certain legal threshold, the holdings of the fund are not completely “coal-free.” Therefore, this product sustainability statement is not completely supported, and the information may be misleading. Another situation involves incomplete sustainability statements for a savings account, which omit or hide important information. For example, the green deposit accounts of a commercial bank may lend money to fund sustainable projects, while other savings accounts do not claim to earmark separate funds. The bank may place a large forest rainforest image on its account page, marking the page with the text “green savings” while juxtaposes its “green savings” accounts with “other savings accounts.” Internal policies How can corporates manage themselves well enough to avoid regulatory risks from greenwashing? An anti-greenwashing action plan proposed by the UK law firm Norton Rose Fulbright can be divided into eight aspects: sufficient internal resources and training plans, clear and comparative sustainability information, independent verification, risk management and internal governance, record keeping, monitoring, and a whistleblower system. Regarding internal resources and training, companies should ensure sufficient internal training for sustainability personnel, including risk control management and how to identify greenwashing factors. Environmental or other ESG statements in product advertising or information disclosure must be clear, specific and realistic. If the product is of a technical nature, it should be described in detail, and any restrictions on sustainability claims should also be clearly indicated. When promoting and comparing sustainable products, companies should ensure that the content is objective, using calculation methods recognized by independent external certification units. At the same time, they should appoint professional third-party verification bodies to verify the legality of sustainable green claims, which external consumers may view as more professionally persuasive than self-disclosure. In addition, companies should internally plan and evaluate their ESG risk management, and establish a sustainability committee to manage disclosure. A compliance assessment mechanism must be in place before sustainable products are put on the market. Sustainability statements and ESG disclosures in product advertising should be well documented so that if questioned by outsiders, the issuer can provide complete documentation, including verification and approval documents. The data used to support the statement should be recorded so that regulators can check its authenticity. By implementing appropriate internal control mechanisms, companies can ensure that ESG statements or information disclosures are regularly monitored to ensure accuracy as well as compliance with the latest regulations, and can be modified or withdrawn when necessary. A whistleblower reporting system should also be established so that potential greenwashing issues in ESG activities can be supervised and verified by internal and external parties. Complaints about greenwashing by senior executives within the company should be taken seriously and investigated, and internal or external legal consultation should be sought so that potential greenwashing risks can be resolved immediately when they arise. With the rise of sustainability awareness and the popularity of ESG, the possibility of greenwashing within financial products has attracted much attention. The Green Claims Code is undoubtedly a top priority to maintain market order between buyers and sellers to protect the rights and interests of consumers and investors. The author of this article is an associate researcher at TABF.