Greenwashing - Product Development Considerations for Financial Services Firms

For providers of ESG (Environmental, Social and Governance), Green and Sustainable related financial products, the coming months look set to be driven by three emerging trends:

•  Growth in Sustainable and Green Products;

•  Regulatory oversight; and

•  Liability Risks including greenwashing and insufficient disclosures. 

These trends are a continuation of risks that are driven by new products and opportunities. The opportunities for Financial Services firms and the wider economy in relation to ESG-related products is clear, but the accumulation of the trends together, may lead to increased opportunity for conduct risk to arise in relation to ESG-related products, and therefore a greater risk of Greenwashing (the attempt to make a company, their policies, products or services more “green” than they actually are, thereby misleading clients, customers and other market participants). 

However, a lack of a common definition, taxonomy and credentials of what constitutes an ESG product, a lack of data to support sustainability criteria, and the emergence of a “greenium” (e.g. lower interest rate) on ESG-related finance provides further incentives to accentuate the ESG performance of the underlying assets and thereby, creating opportunity for Greenwashing to emerge.

In this document, we look at the drivers of greenwashing and the emergence of conduct and liability risk, the products driving these risks and existing regulatory considerations, as well as the key actions firms can take to mitigate and manage these risks.