Asset managers guilty of 'greenwashing,' or exaggerating sustainability credentials, watchdog group claims

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The lack of a binding legal definition for greenwashing presents a hurdle to regulators tackling investment funds that exaggerate their sustainability credentials, a global securities watchdog said in a report on Monday.

Trillions of dollars have flowed into funds that tout their environmental, social and governance (ESG) factors, but IOSCO, which groups securities regulators from across the world, said greenwashing was already being compounded by related "malpractices".

The report, based on a survey of IOSCO members to coincide with the COP28 U.N. climate summit in Dubai, said most jurisdictions do not specifically define greenwashing in legally binding provisions, it said.

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Some regulators are already fining firms for greenwashing.

"While authorities have made efforts to adapt their supervisory practices and enforcement regimes to prevent and address greenwashing, it is still necessary to fully test the adequacy and effectiveness of these mechanisms," IOSCO said.

Regulators face data gaps, concerns over the quality of benchmarks used to rate the ESG aspects of companies, and lack of consistent labeling of funds that threaten investor protection, IOSCO said.

A demonstrator holds a plastic jerry can with an EU flag label during a protest against the greenwashing of nuclear energy and gas in Frankfurt, Germany, on Jan. 11, 2022. (REUTERS/Kai Pfaffenbach)

"While some of these challenges are currently being addressed, greenwashing remains a fundamental market conduct concern that poses risks to both investor protection and market integrity," IOSCO said.

"Countering these risks is not an easy task given that greenwashing can take different forms and can vary in scope and severity."

IOSCO said that other malpractices, such as "greenhushing" and "green-bleaching" were becoming more prominent as well.

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Green-bleaching refers to asset managers playing down the sustainability credentials of their funds to avoid extra regulatory requirements. Greenhushing refers to companies under-reporting their sustainability credentials to avoid investor scrutiny.

"None of the survey respondents has specific frameworks to regulate these concepts," IOSCO said.

IOSCO said that planned climate-related corporate disclosures at the European Union and global level, along with new rules to regulate ESG ratings, would help tackle greenwashing.