Central Bank to increase scrutiny on funds in clampdown on ‘greenwashing’

The Central Bank said it will increase scrutiny on funds and firms raising money internationally through the State for eco-friendly investments, as policymakers and regulators globally seek to clampdown on "greenwashing".

Greenwashing refers to inaccurate claims that investments are sustainable and climate friendly.

“To ensure this transition to a greener financial system is successful, it is imperative that the sustainability features and risks of new products are properly designed and disclosed and that the additional layer of complexity this represents is navigated properly by regulated firms,” the Central Bank said in a report on potential risks in the securities markets.

“Special care is needed to avoid misconduct or other investor or market detriment in this arena given the novel and evolving nature of green finance.”

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Risks

The report added: “We see risks to this successful transition arising where strong investor demand is met by the supply of financial products purporting to be sustainable in nature but which in reality do not meet environmental standards, a practice known as greenwashing.”

More than €3.2 trillion of international assets are domiciled in Irish funds, according to the Irish Funds industry group, which forecast last week that such assets under management are set to rise to more than €5 trillion by 2025. Euronext Dublin is the world’s biggest venue for the technical listing of debt instruments issued by states and companies globally.

The Central Bank said it will focus this year and beyond on the implementation of incoming international regulatory changes aimed at working out what financial products are “truly eco-friendly”.

“This will include closely scrutinising applications for authorisation of green funds or securities offerings where prospectus approval is required,” it said.

The European Commission will be introducing rules for asset managers on environmental, social and governance (ESG) disclosures in the middle of next month, along with a taxonomy to provide clear legal definitions on sustainability that will make greenwashing more difficult.

It comes at a time when investor interest in ESG products is soaring, fuelled by the Covid-19 pandemic.

The global value of assets where investment decisions are driven by ESG data breached $40 trillion (€33.3 trillion) in 2020, having almost doubled over four years, according to the United Nations-backed Principles for Responsible Investment organisation.

Still, the European Securities and Markets Authority (ESMA) said last month that there needs to be new rules to regulate ratings on the ESG aspects of companies to avoid greenwashing.

Demands

“The market for ESG ratings and other assessment tools is currently unregulated and unsupervised,” the ESMA said. “When combined with increasing regulatory demands for consideration of ESG information, there are increased risks of greenwashing, capital misallocation and products mis-selling.”

The Central Bank said that with increasing social awareness of sustainability issues, financial firms may see an incentive to advertise their products and services as sustainable in order to benefit from investor appetite.

“This raises the possibility that investors are misled into buying financial products that do not meet the environmental standards investors expected when making their investment,” it said. “Firms need to be vigilant to avoid this risk, so that investors’ best interests are protected and the reputation of the emerging concept of green finance is not damaged.”