When looking at what lies ahead for the financial services industry, the theme of sustainability unites most organisations we work with. At KPMG, we believe sustainable growth is the best way to build a successful business and have a lasting impact on our environment and communities.
Sustainability matters when it comes to a business’s future. Expectations around companies' sustainability credentials – determined by their Environmental, Social and Governance (ESG) practices – continue to evolve.
Investors are increasingly putting downward pressure on their portfolio companies, clients are imposing ESG requirements on their suppliers, employees increasingly seek companies that align with their personal values, and customer behaviour is shifting in favour of ESG ideals.
The financial services sector has built an entire industry on such demands: the market for ESG-centric products has grown at a compound annual rate of 27 percent over the past six years. Firms in the Crown Dependencies are seizing on these same trends and opportunities.
However, organisations are coming under pressure globally to demonstrate clear and tangible action on these issues. This requires a holistic approach – building sustainability considerations into long-term strategy, investment policies and decision-making from the top down, as well as a transparent and ethical approach to disclosure on ESG.
If businesses make dishonest or unjustifiable performance claims —whether to give the illusion they’re tackling challenges such as climate change, or to attempt to secure competitive advantage — it’s likely they’ll be accused of greenwashing.
The consequences for this are becoming increasingly severe. Litigation and regulatory enforcement around greenwashing is starting to mount, but we believe this is just the beginning. Stakeholder demands around ESG transparency and authenticity are growing. Our most recent survey of global CEOs shows that 71% believe scrutiny on ESG will continue to accelerate.
What are the issues associated with Greenwashing?
The term greenwashing implies any dishonest practices used by businesses to represent themselves as more sustainable – either by giving a false impression or providing misleading information as to the sustainability of a product/service.
It’s a given that no organisation should ever be engaging in greenwashing. Businesses should always be open and transparent with what they’re selling. Customers should be able to trust their products. Engaging in greenwashing can erode that trust, making it difficult or even impossible for consumers to take an organisation’s ESG messages at face value.
But it’s not just reputation at risk. Greenwashing can also have legal and regulatory consequences.
In Jersey for example, the regulatory Codes of Practice which set out the principles that guide the financial services sector require regulated firms to act with integrity. This also means taking reasonable steps to avoid making statements that are misleading, false or deceptive.
What’s more, the Channel Islands have recently introduced specific provisions into their regulatory frameworks to address the risk of greenwashing relating to investments marketed as “sustainable”. Failure to follow these rules can lead to enforcement action being taken by the regulators.
This echoes the approach taken in many other leading finance centres. The UK regulator is pursuing new rules to prevent greenwashing, including a new labelling framework for financial products. The EU, meanwhile, has introduced a wide range of sustainable finance regulatory measures to promote transparency in financial services as well as looking to expand enforcement powers. Recent raids by prosecutors in Germany and the USA on financial institutions remind us that anti-greenwashing provisions increasingly have teeth.
It’s clear, then, how much of a risk greenwashing poses. And for most organisations, it’s a risk that’s almost impossible to eradicate entirely. But managing it carefully can help both minimise the chance of a legal, regulatory or reputational hit – and create opportunity.
Five ways to effectively manage greenwashing risk
Organisations should take a strategic approach to face greenwashing risk. These five recommendations can help a business get started:
1) Understand your greenwashing risk
This approach should begin by acknowledging that greenwashing risk may exist in different places throughout an organisation, including:
- Through its environmental impact and policies in areas such as diversity, inclusion and corporate governance.
- Through the products and services the organisation sells, and where sustainability claims may not stand up to scrutiny.
- Through links to suppliers and consumers who may then want to secure arrangements that directly contradict the organisation’s ESG aims.
Organisations should keep in mind the importance of identifying potential greenwashing risk exposure throughout their operations and professional relationships. There are several challenges involved in this:
a) Lack of common definitions
Terms such as sustainability, green and ESG are loosely defined at best. There’s room for confusion even in the financial services sector, even where regulators have introduced new regimes to standardise terminology and definitions.
b) Lack of consistent and comparable data
Organisations need reliable data to identify greenwashing risk, particularly where third parties are involved. Yet ESG data coverage remains patchy – its quality varies hugely around the world and across asset classes. While the ESG ratings industry continues to grow, using its services has not always been enough to protect organisations from greenwashing accusations.
2) Education
Sustainability is a relatively new discipline. This means it’s important that organisations equip staff with the required knowledge. Upskilling the whole organisation on the basics of ESG and greenwashing risk can provide stronger foundations on which to build a more robust approach.
The board should also take part in such upskilling programs. Greenwashing risk represents a threat to entire organisations, and as such can also leave individual leaders vulnerable to personal risk or even legal / regulatory sanctions. So the implementation of programs to upskill the board and employees on the fundamentals of ESG and the risk of greenwashing is a critical starting point.
3) ESG governance
Businesses should embed ESG criteria in their existing risk management procedures and controls, and consider introducing a bespoke ESG policy. Good ESG governance will enable the business to make accurate public statements, which in turn will support their claims of how ‘green’ or sustainable their products and services are.
All of this is increasingly overlaid with ESG governance and reporting expectations set by regulators. The UK has already mandated climate disclosures for many financial services firms – applying the recommendations of the Taskforce for Climate Related Financial Disclosures (TCFD), which include climate governance and risk management considerations.
Here in the Crown Dependencies, the Guernsey Code of Corporate Governance was recently updated to include requirements on boards to consider climate risk. Other regulatory – such as the Jersey Financial Services Commission – are expected to follow suit.
4) Keep on top of evolving regulation
Regulations will help avoid the risk of greenwashing in the longer term by providing a framework for compliance, but these can also generate complexity and a lack of clarity.
A slew of recent sustainability “downgrades” of funds in the European markets has highlighted the risk of firms incorrectly self-certifying products as meeting enhanced ESG characteristics, as described in the Sustainable Finance Disclosure Regulation (SFDR). And whilst the EU’s taxonomy regulation is intended to provide a defined list of sustainable activities in the real economy, this is an expanding and dynamic list that will continue to evolve.
Rather than transposing SFDR into national law, the UK has opted to develop its own framework. The upcoming “UK Green Taxonomy” may be based on the EU taxonomy’s scientific metrics, to the extent that they are deemed appropriate for the UK market. UK-EU divergences are also appearing in other areas of anti-greenwashing measures in the financial services space.
Whilst these regulations do not directly apply in the Crown Dependencies at this time, they drive the expectations of our clients and stakeholders, and set wider global standards that can catch Jersey firms and structures.
In response to that changing environment, the Government of Jersey is expected to consult in the coming months on a Sustainable Finance Policy Roadmap for the island, building on the work of Jersey Finance in defining the industry ambitions in this space.
It is therefore essential for firms to keep abreast of emerging regulations, both locally and globally.
5) Regulator and industry guidance
With the introduction of changes to the Codes of Practice in Jersey in 2021, the JFSC has set out its first guidance and expectations in this space. That is unlikely to be its last intervention in preserving the reputation and integrity of the island’s financial sector. We expect to see further guidance emerging over time.
Equally, many industry bodies and standard setters are developing their own guidance around ESG, which helps define best practice and avoid accusations of greenwashing. For instance, in the Private Equity space, the ESG Data Convergence Initiative’s metrics are being used by many of our clients as an industry benchmark, in the absence of prescriptive rules. KPMG also recently collaborated with the British Venture Capital Association to provide further sector-specific guidance in relation to TCFD implementation.
Voluntary frameworks and initiatives – such as the UN Global Compact – can also provide a valuable set of tools and benchmarks around which firms can structure their sustainability credentials.
How we can help
Greenwashing risk represents a potential threat to organisations, and one that can possibly destroy significant shareholder value. Local firms should consider how to manage and mitigate their greenwashing vulnerabilities.
KPMG professionals assist clients in fulfilling their purpose and achieving their ESG goals. We can work with you to enhance trust, mitigate risk and help unlock new value as you build a resilient business for a more sustainable future.
Find out more by contacting David Postlethwaite at dpostlethwaite@kpmg.com.
