Product Disclosures in the Financial Services Industry: How to Avoid Greenwashing

Greenwashing is becoming an increasingly prevalent issue in the financial services industry. Inconsistency, exaggeration, omission, or unsubstantiated claims in Environmental, Social, and Governance (ESG) financial product disclosures are the most common issues that give rise to the risk of greenwashing.

According to a Reuters report, instances of greenwashing by banks and financial services companies globally rose by 70% in the 12 months leading up to September 2023, with 148 cases reported, up from 86 in the previous year.

The consequences of greenwashing can be severe, with substantial fines and penalties. For example, in a landmark case, the Federal Court ordered Mercer Superannuation (Australia) Limited to pay an $11.3 million penalty for misleadingly stating the sustainability of some of its superannuation investment options.

In this blog, I provide a brief overview of greenwashing and the regulations surrounding it, share insights and lessons from the Mercer case, and explain how adopting lifecycle management can help organisations mitigate the risk of greenwashing.

Understanding Greenwashing and Navigating the Regulatory Landscape

Greenwashing involves an organisation making misleading sustainability-related claims to investors or consumers, usually to boost its reputation and bottom line. This can happen intentionally or unintentionally; however, greenwashing can have serious consequences, such as reduced consumer trust, reputational damage, and increased scrutiny from regulators.

Here is an example: an investment product labelled as a ‘No Gambling Fund’ might still invest in companies that earn some revenue from gambling, misleading investors about the product's true nature. It is clear that this kind of misrepresentation can erode confidence in sustainability claims across the market.

To combat greenwashing, various regulations have been introduced globally, focusing on the main goals of maintaining trust in the market and enabling consumers and investors to make informed decisions while transitioning to a more sustainable economy. The EU and the UK are leading this charge, with rules like the UK's FCA anti-greenwashing regulations and Sustainability Disclosure Requirements (SDR) and investment labels regime (PS23/16) and the EU’s Sustainable Finance Disclosure Regulation.

The impact of these regulations extends beyond mere compliance and pushes companies to rethink how they create, market, and report on products, requiring transparency and justification of ESG claims. Organisations are expected to clearly outline how sustainability is integrated into their product strategies and provide evidence for their ESG targets, ensuring claims are accurate and verifiable. Organisations are encouraged to adopt robust governance and lifecycle management practices to stay competitive. This approach helps companies align with new regulatory expectations and prepares them for potential third-party verification of their sustainability claims.

Key Learning from the Mercer Case

In August 2024, the Federal Court of Australia has ordered Mercer Superannuation to pay an $11.3 million penalty after admitting to making false and misleading statements about the sustainability of its 'Sustainable Plus' investment options.

Mercer Superannuation marketed its 'Sustainable Plus' investment options as suitable for individuals committed to sustainability, claiming these options excluded investments in companies involved in carbon-intensive fossil fuels, alcohol production, and gambling. However, the court found that these investment options did, in fact, include investments in companies involved in these excluded industries, thereby misleading investors.

The court ruled that Mercer failed to implement adequate systems to ensure the accuracy of their ESG claims and did not properly monitor or enforce the sustainability exclusions it had advertised. As a result, the misleading statements significantly undermined consumer confidence in ESG claims within the financial services industry.

Key learnings are:

1. Ensure Accuracy in ESG Claims: Develop processes to verify that all ESG claims are accurate and supported by reliable data to avoid misleading consumers and potential penalties.
2. Implement Robust Internal Controls: Establish strong internal controls and monitoring systems to check and validate sustainability claims consistently.
3. Prepare for Regulatory Scrutiny: Stay updated on regulatory requirements and reinforce the company's ability to substantiate ESG claims to mitigate financial and reputational risks associated with greenwashing.

Ultimately, this case warns the financial services industry about the importance of truthful ESG disclosures and the potential consequences of greenwashing.

Check out my previous blog, Navigating Anti-Greenwashing Rules: Essential Steps for Compliance, where I explore in detail the expectations and how to leverage available tools to enhance the credibility of sustainable products and minimise the risk of greenwashing, ultimately supporting a more sustainable economy.

Skyjed’s Lifecycle Management Solution

At this point, we know that one of the most common causes of greenwashing is the lack of reasonable and verifiable data to support sustainability claims. Skyjed’s Lifecycle Management and Governance Platform addresses this issue by centralising all data points across your product or service portfolio into a single source of truth. This approach not only helps manage compliance but also enhances transparency and accountability, effectively reducing the risk of greenwashing.

How Does Skyjed Work?

Let's explore how Skyjed can help you avoid greenwashing with a practical example of a product like a Green Bond. Here are three simple steps to ensure your sustainability claims are accurate and trustworthy:

STEP 1: Set Sustainability Goals and Assess Claims

• Define Goals: Start by clearly defining your sustainability goals within your strategy. Explain how you plan to measure and achieve these environmental targets.
• Assess Claims: Use Skyjed's tools to self-assess your sustainability claims against global best practice checklists aligned with financial regulators such as the FCA and ASIC. This step ensures that your claims are grounded in recognised standards and practices.

STEP 2: Build Evidence to Support Your Claims

• Collect Data: To substantiate your goals and claims, gather all sustainability-related data that align with ESG reporting standards. This data will serve as the backbone of your sustainability narrative.
• Centralise Records: Keep historical records centralised within the platform to ensure all information is easily accessible and verifiable.
• Regular Reviews and Automation: Conduct regular reviews to validate your claims continuously after launching your product. Utilise Skyjed’s automation features to set thresholds for greenwashing risks and receive notifications when those thresholds are met.
• Mitigation Actions: When potential greenwashing risks are identified, mitigation actions should be immediately implemented to address and resolve these issues.

STEP 3: Continuous Monitoring and Improvement

• Ongoing Reviews: Perform regular reviews throughout the product’s lifecycle to ensure your sustainability claims remain accurate and up-to-date.
• Performance Dashboards: Leverage Skyjed’s performance dashboards to monitor your product’s impact and make data-driven decisions.
• Risk and Strategy Actions Report: Use the Risk and Strategy Actions Report to delve deeper into your product strategy and refine it as needed, ensuring continuous improvement and alignment with sustainability goals.

By following these steps, Skyjed’s Lifecycle Management Solution helps your organisation maintain credibility in its sustainability claims, prevent greenwashing, and stay ahead in a competitive market.

About Skyjed

Skyjed’s AI-powered end-to-end lifecycle and governance platform is mission control for product management and your business as a whole.

Bringing together every data point across your entire product portfolio and lifecycle into a single source of product truth, it gives our clients a new perspective to make more strategic lifecycle decisions to launch, monitor, optimize and win with brilliant products.

Our industry-leading platform has received numerous awards and recognition from clients and industry bodies, demonstrating our commitment to innovation and excellence.

Watch our Skyjed Video.