Greenwashing Risk Grows in China ESG Funds

Chinese asset managers are improving ESG awareness, but weak regulation means green claims often don’t match reality, says Greenpeace.

Greenwashing is a growing risk in the Chinese fund management sector, as marketing of ESG products runs ahead of standards and regulatory oversight, a new report by Greenpeace has found. The environmental campaign group’s study of 16 major Chinese asset managers found they had improved their awareness of climate risk…

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ESAs Add More Ideas into SFDR Mix

In a bid to simplify the regime, the European Supervisory Authorities run the risk of adding complexity, regulatory specialists say. 

The European Supervisory Authorities’ (ESAs) proposal for a revamped Sustainable Finance Disclosure Regulation (SFDR) may seek to clarify the regime, but lawyers are concerned it could make it diverge from other jurisdictional rules, creating disruption for fund managers.  The European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and…

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ESMA Tackles Greenwashing with New Tool

The EU watchdog plans to ramp up scrutiny of sustainable financial products, warning providers not to make “unsubstantiated” claims.

The European Securities and Markets Authority (ESMA) has developed a new tool that will enable it to better identify cases of greenwashing in the investment management industry. In a new report, the watchdog said it had recently increased its analytical efforts to detect mismatches between green claims and actual investment…

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Take Five: Modi Feels the Heat

A selection of the major stories impacting ESG investors, in five easy pieces. 

Climate wasn’t high on the ballot in India’s election, but Modi must soon face uncomfortable truths on coal.

Modi feels the heat – Conducted in record temperatures, the world’s biggest exercise in democracy dealt a blow to the ego of incumbent Prime Minister Narendra Modi, but it’s less clear how the outcome of India’s general election will impact its net zero transition. Stock prices were down this week on the assumption that reliance on coalition partners would slow the pace of the infrastructure investment plans of Modi’s ruling Bharatiya Janata Party (BJP). The impact of the election on India’s climate policy might be less significant, for a number of reasons. First, other priorities regularly topped polls of voter concerns, notably inflation and unemployment, although this has evolved recently, partly due to increased instances of climate-induced physical impacts, from landslides to floods to severe crop losses. Second, both the BJP and its leading opponent, Congress, are strongly committed to India’s continued adoption of renewables, albeit via different means – with the challenger party promising in its manifesto a new green transition fund and more resources for India’s National Adaptation Fund. A third reason, which leads on from the first two, is that neither major party has been forced to properly address India’s biggest climate problem – vast and rising emissions from coal. Indeed, current policy is for domestic production to increase up to 2040 to reduce reliance on imports. Coal – and Modi’s close relationships with the controversial Adani Group – notwithstanding, the BJP’s record on solar and hydrogen investments, and fossil fuel subsidy reductions is impressive. But regardless of the make-up of the coalition, India’s next government will need to up the ante to have a hope of meeting even its existing climate commitments, such as installing 500GW of renewables, which will handle 50% of electricity demand, by 2030.

Down, not out – Support for climate-related resolutions at the AGMs of US firms has been closely watched this proxy season for further signs of a “stewardship depression” witnessed since 2021. But climate votes only tell part of the story, with a high number of social-themed filings also vying for investor backing. These include four shareholder proposals seeking more action and transparency on pay, working conditions and racial equity by Walmart, the world’s largest private employer. Prior to

EU SAF Action Risks Leaving Investors Red-faced

Regulatory pressure on airlines over greenwashing increases as deadlines for widespread incorporation of sustainable fuel approaches.

The European Commission (EC) has stressed investors in airlines and sustainable aviation fuels (SAFs) have nothing to fear amid its action over potentially misleading green claims, but reputational risk remains a pervasive problem. At the end of April, the EC and EU consumer authorities sent letters to 20 airlines identifying…

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A Level Playing Field for Green Claims

Dr Torsten Schwarze, Partner at Morgan Lewis, explains how two EU directives will shape Europe’s legal framework to restrict greenwashing.

The European Commission has initiated two directives with the intent of clarifying and unifying the EU’s legal framework on environmental claims: the EmpCo Directive and Green Claims Directive.

ESG compliance is becoming increasingly important for companies, and the development of technologies and products to help reduce their carbon footprint has become a priority for many. Progress in this area is actively marketed by many companies hoping to achieve competitive advantages by labeling their products as ‘green’, ‘sustainable’, ‘recyclable’, or ‘climate neutral’.

Not surprisingly, such general green claims are often the object of litigation, as plaintiffs allege such statements as being misleading, deceptive, or simply false. While the German courts are still struggling to find common ground on these issues and a clarifying decision of the Federal Supreme Court (Bundesgerichtshof) may not be expected before June 2024[1], Brussels has initiated two directives aimed at clarifying and unifying the legal framework on environmental claims.

The first – Directive (EU) 2024/825 of the European Parliament and of the Council amending Directives 2005/29/EC and 2011/83/EU as regards empowering consumers for the green transition through better protection against unfair practices and through better information (the EmpCo Directive) – aims to improve product information and ban greenwashing and other unfair commercial practices.

The commission is currently working on a proposal for a second directive on substantiation and communication of explicit environmental claims (the Green Claims Directive, and, together with the EmpCo Directive, the directives), which shall complement and operationalise the EmpCo Directive. In this article, we summarise the content of both and explain how they are intended to interact in the EU’s fight against greenwashing.

The EmpCo Directive – legislative process

Published in the EU Official Journal on 6 March, 2024 and entered into force on 26 March, 2024, EU member states will have 24 months to implement the EmpCo Directive’s regulations. Starting 27 September, 2026, the new directive must be applied by the member states.

Germany has announced its intention for a quick transposition of the EmpCo Directive by amending the German Act against Unfair Competition, which shall be accomplished independently from the legislative process regarding the Green Claims Directive, whereas other EU member states, such as Austria, plan to implement the EmpCo Directive in conjunction with the Green Claims Directive.

Content and scope of

EU Fund Names Rules: Too Much Too Soon?

ESMA’s finalised guidance isn’t fully aligned with other jurisdictions and could be impacted by the SFDR review. 

Industry pundits are concerned that guidance on fund names for EU-domiciled sustainable products may have jumped the gun ahead of a final decision on the Sustainable Finance Disclosure Regulation (SFDR).  Published on 14 May, the European Securities and Market Authority’s (ESMA) final report on fund names using ESG or sustainability-related…

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Take Five: Green Means Green

A selection of the major stories impacting ESG investors, in five easy pieces. 

European regulators have ratcheted up efforts to eliminate greenwashing from the investment sector.

End of an era I – The fight against greenwashing inched ahead with the release of final guidelines for naming ESG- or sustainability-related funds by the European Securities and Markets Authority (ESMA). It had previously been possible to launch an EU environmental opportunities fund, claiming Article 8 classification under the Sustainable Finance Disclosure Regulation (SFDR), while allocating as little as 10% of assets to demonstrably green investments. ESMA has now declared that era to be over, with new guidelines and thresholds including a minimum of 80% of investments to meet funds’ environmental or social characteristics, or sustainable investment objectives. Initial reactions suggested the market has welcomed some aspects – such as definitions for what could be included in a fund with an ‘impact’ or ‘transition’ label – but is baffled by others. These include ditching plans to require funds labelled ‘sustainable’ to contain at least 50% sustainable investments as defined by SFDR – due to feedback saying this was too open to discretion – instead opting to introduce a commitment to invest “meaningfully” in sustainable investments – whatever that means.

End of an era II – Until recently, opportunistic portfolio managers could stuff their ‘green’ portfolios with tech stocks to deliver strong returns at relatively little expense to the planet. That scam has long been rumbled, but the gig is definitely up now that Microsoft – which in 2020 pledged to become carbon negative by the end of the decade – has admitted its carbon emissions jumped 30% last year, as it pursued dominance in the AI market. The upsurge – confirmed in the tech giant’s annual sustainability report this week – followed news of a deal with asset manager Brookfield to build 10.5 gigawatts of renewable energy capacity to support its plans to rely solely on clean power sources by 2030. With Microsoft having offered to relocate staff amid rising US-China tensions, its AI strategy might face as many ‘S’ and ‘G’ as ‘E’ headwinds. But a sector-wide power grab seems likely, within the context of wider demand trends, with the International Energy Agency forecasting data centres will double their energy needs to 800 terrawatts by 2026, fuelled by both cryptocurrencies and AI.

Levels of engagement – More evidence was provided this week

Natural Gas Threatens Canadian Taxonomy

Despite warnings on its climate impact, demand for Canadian liquefied natural gas continues to grow.

Industry experts have expressed concern on the potential inclusion of natural gas in Canada’s proposed taxonomy and the way it could undermine its domestic and international credibility.

Launched in 2021, the Canadian Sustainable Finance Action Council delivered a roadmap report detailing the taxonomy’s approach and governance structure the following year – setting the path for further progress. The council completed its three-year mandate on 31 March.

But progress on the taxonomy has been slow. Research from Canadian environmental advocacy organisation Environmental Defence pointed to reports suggesting that internal government conflicts around the place of natural gas in the taxonomy had stalled its release.

“There was significant pressure for the taxonomy to specifically allow liquefied natural gas (LNG) exports as a ‘transition’-labelled activity, even though there is scientific consensus that averting the worst impacts of climate change requires the rapid phase-out of fossil gas,” Adam Scott, Executive Director at Shift: Action for Pension Wealth and Planet Health, told ESG Investor.

He added that the inclusion of gas in the Canadian taxonomy was “entirely unworkable” and a “recipe for additional greenwashing”.

“Institutional investors should listen to experts [and] be sceptical of any claims made by the LNG industry about its role in our future energy system,” said Scott.

Crushing credibility

The environmental impacts of natural gas, particularly LNG, are high. Methane, the primary component of LNG, has a global warming potential around 82 times higher than CO2 when burned as a fuel.

“Wrongfully labelling gas as ‘sustainable’ under this taxonomy would entirely squash its international credibility,” warned Julie Segal, Senior Manager for Climate Finance at Environmental Defence, adding that the inclusion of fossil fuels that do not align with climate goals would also defeat its purpose.

“If Canada diverts further from science it will not only be embarrassing, but will invalidate all of the work that has gone into creating a tool that helps clean up and align our financial system with climate action.”

Ahead of the publication of the UK’s own taxonomy, the CEOs of three major sustainable investment organisations echoed similar concerns on the inclusion of natural gas –