Real world rhetoric – Watchdogs and investors increase scrutiny on ESG claims

At the same time, heightened public and investor demands for accountable sustainability goals have cast more intense scrutiny on ambiguous or exaggerated claims.   

This scrutiny demands that claims are backed by verifiable, transparent and genuine efforts, pushing companies to move beyond rhetoric and adopt substantive action. This has led to a shift in the financial sector towards a more nuanced perspective on definitions of sustainability or green, coupled with deeper understanding of the standards required to live up to ESG claims. Banks are, of course, aware that regulatory risk, with its financial and reputational consequences, should be top-of-mind in the coming years.

While attention so far has largely focused on greenwashing, similar risks apply with so-called social-washing and bluewashing covering misleading claims around governance and ethics. In this article, we examine the current state of greenwashing and other ESG-related litigation facing financial institutions, drawing out the key risk factors exposing banks to disputes and a few practical tips to head-off such risks.

Full steam ahead – Growing regulatory attention

ESG regulation has surged ahead at a breakneck pace, resulting in growing administrative burdens and lengthier disclosures. However, this rapid development has not necessarily led to improved alignment between investor expectations and industry definitions of key ESG concepts. To address this issue, many regulators have moved to establish common benchmarks on greenwashing, including:

As for what this means for regulatory action, as the chair of the European Securities and Markets Authority noted in a recent interview, EU national authorities have been on a "learning curve" and adopted a gradual approach. Thus far, regulatory action in Europe has primarily involved interactive processes, such as consultations for additional information or requests for investment managers to update fund names, methodologies or investment processes. This may be set to change following the publication of the Final Report on Greenwashing and the clarity it now offers.

In the UK, public action against financial institutions has primarily been led by the Advertising Standards Authority (ASA) from a consumer protection perspective. Although the FCA has been active, this has not yet led to high-profile enforcement proceedings in respect of greenwashing.

In contrast, other jurisdictions are further along the curve. Look no further than the US and Australia to see what rigorous supervision entails. Both the US Securities and Exchange Commission (SEC) and Australian Securities and Investments Commission (ASIC) have adopted active enforcement approaches, resulting in numerous greenwashing disputes and investigations. In Australia, these cases have included a focus on the representations made by funds in respect of the investments these entities make. ASIC has pursued superannuation funds and other investment vehicles with the agency successfully obtaining financial penalties in the courts and other cases ongoing

Growing risk of litigation and investigations

The surge in greenwashing litigation underscores the escalating scrutiny faced by financial institutions over their ESG claims. Recent high-profile cases reveal heightened litigation risks and a tightening grip on enforcement associated with misleading statements, in some cases with significant legal and financial repercussions.

Our survey of some of the key recent cases below illustrate the imperative to ensure ESG credentials are substantiated and transparent, in circumstances where regulatory claims, shareholder lawsuits, NGO actions and claims by competitors over unfair competition are on the rise.  

• SEC vs. DIMA: The SEC fined DIMA $25 million for materially misleading statements about its credentials. DIMA marketed itself as a leader in ESG while failing to implement key provisions of its global ESG policy and lacking accurate procedures to support its claims. 
• SEC vs. Goldman Sachs Asset Management (GSAM): GSAM was fined $4 million for failing to maintain consistent policies and procedures for its ESG-marketed funds. The company did not adequately follow its own ESG guidelines, leading to misleading representations about its investment practices. 
• SEC vs. BNY Mellon: BNY Mellon agreed to a $1.5 million penalty for overstating the extent of ESG quality reviews in its mutual funds. The SEC found that not all investments underwent the promised ESG evaluations. 

• ASIC vs. Mercer, Vanguard and Active Super: The ASIC took action against these firms for alleged greenwashing. Mercer agreed to a A$11 million penalty, while Vanguard, which faced claims of misleading ESG claims about one of its funds, is still contesting some aspects of the allegations. The Federal Court found Vanguard in breach of the ASIC Act for misleading conduct. 
• ASIC vs. Diversa: A fund issuer had to pay penalties for overstating its investment exclusions related to environmental and social criteria. 

• ASA vs. HSBC: The ASA investigated poster advertisements published by HSBC on bus stops, describing selective sustainable objectives and projects together with contextual imagery (such as waves and trees). The ASA found these ads were misleading and unclear and that HSBC had not disclosed that it continued to finance high-carbon industries. 
• Potential shareholder action against Drax: In early 2024, there were reports that Drax might be faced with a claim brought by shareholders under section 90A and schedule 10A of the Financial Services and Markets Act 2000 relating to its portrayal of its sustainability practices and the environmental benefits of its biomass energy. It was alleged that Drax’s claims had inflated the value of its shares and investors suffered losses when the share price fell significantly once the claims were found to be inaccurate. 

• AMF vs. Primonial: The French Financial Markets Authority found that Primonial failed to meet its own ESG criteria for certain assets and reached a settlement agreement imposing a €40,000 fine. While this fine is negligible, the case sends a message that the agency will start being more rigorous towards enforcement.

What banks can do – Greenwashing risk factors 

Risk factors identified from case law

Several risk factors which have led to sustainability claims being considered misleading emerge from the analysis of greenwashing litigation: 

• High-level descriptors: it is clear from the disputes seen to date that vague or broad claims about sustainability risk being found to be misleading. Terms like "eco-friendly" or "green" without clear definitions can lead to misunderstandings and legal challenges. 
• Data gaps: Insufficient or inaccurate data to back ESG claims is a significant risk, which can only be mitigated by ensuring sustainability data is reliable and verifiable. 
• Third-party information: Reliance on third-party data or certifications exposes banks to risk if these sources turn out to lack credibility. Those risks might be mitigated by thorough due diligence on data sources. 
• Balance between marketing and accuracy: There is often a tension between making compelling marketing claims and maintaining accuracy. Overemphasis on marketing can lead to exaggerated claims that fall short under scrutiny. 

Practical tips to safeguard against greenwashing 

To help organisations navigate the complexities of ESG compliance, below are practical tips to safeguard against greenwashing and ensure the credibility of sustainability claims. 

Conclusion

As the clarity from regulatory guidance and past disputes becomes more evident, there is significant risk for those who fail to understand and learn such lessons. To avoid legal and reputational pitfalls, companies must be vigilant in ensuring their ESG claims are accurate and substantiated to avoid legal and reputational risks. By bolstering internal controls, enhancing data management, training employees, engaging with stakeholders, and staying informed about regulatory developments, companies can safeguard against greenwashing and build a credible ESG profile. Lessons from recent litigation underscore the importance of transparency, accuracy and accountability in all ESG-related activities. As companies navigate this evolving landscape, aligning ambition with rigorous practice will be essential in building a trustworthy ESG reputation.