Green finance regulation is welcome, but a nuanced approach to scrutinising the industry is vital
Greenwashing is finally being taken seriously. The International Monetary Fund this month called for “proper regulatory oversight” of climate-oriented funds, and said governments must do more to protect investors from being misled.
In many ways the UK is ahead of the curve, with the Competition and Markets Authority already having published a Green Claims Code over the summer, and committed to a root-and-branch review of misleading green claims from 2022. In the wake of COP26, scrutiny will only increase and, next year, the Taskforce on Climate-related Financial Disclosures regime will come into force. Surely this should be great news for investors and consumers alike? Well, up to a point.
Obviously it is good that businesses are compelled to demonstrate any environmental, social and governance-related assertions are justified. And many of us in the social, sustainable and green finance space have been crying out for some regulation to underpin ESG metrics for years. There can be no doubt that greenwashing, and its cousin rainbow-washing, have the potential to damage trust and distort markets. More scrutiny should be welcomed but the nub of the issue is balance.
The ultimate point of ESG products is to play a part in helping deliver balance for the global ecosystem, whether environmental or social, so any regulatory ecosystem must be equally finely weighted. Too light a regulatory touch and misleading claims will remain. Too heavy, and the progress of some businesses could well be stymied.
Some will be hampered by the size of the investment necessary to become more sustainable. Others are simply unlucky in terms of where their business sits in the economic stream; upstream industries typically bear the brunt of environmental impact. And many are fighting for survival as they recover from the pandemic. These differences must be taken into account. In short, to achieve our aims, we need nuance.
Many consumers, funders and investors seem quite capable of applying this nuance in some areas, but not others. For example, renewable energy companies often have great eco-metrics. But it is impossible to make wind turbines without steel, or solar panels without rare earths and critical metals – and the extractive industries that supply those can look unsustainable on paper, yet are still part of the “renewable” chain.
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Equally, we must remember that meaningful change cannot happen overnight. Do we apply the same nuance to a manufacturer that’s still financing machinery it invested in a decade ago – and is tied into supplier terms that can’t be varied without penalty – but makes all its new products sustainably, using ethically and sustainably sourced raw materials? Probably not. Yet unless we do, we discourage those vital improvements.
And now it could get worse. The CMA Green Claims Code could mean that manufacturer becomes more nervous about making any statements at all around the sustainability of its new products. So it may decide, as it clambers from the Covid wreckage, that 2022 isn’t the year to incur more cost. Will it be different in 2023? Will funders be willing to invest in that business’s transition?
Stopping false assertions is important, but if fears of penalties mean some firms don’t invest in or launch new products, we’ll have tipped over into imbalance. To take just one instance, the Code itself references compostable cups as an example area for misleading claims. But to move a business from producing single-use plastic cups to compostable ones – a crucial step with the best intentions – requires significant manufacturing investment. By all means let’s ensure such firms are clear about the details, but only within the context of lauding them for moving in the right direction.
Regulation in this area is essential, but focusing on penalties alone is too blunt if we want to effect meaningful change. Forfeits for false assertions must be coupled with incentives to support more-established firms on their sustainability journey. We want investors, funders and consumers to recognise that all businesses are at different stages. Some might require more support, and investment, than others. And if they have made a huge leap forward, let’s not castigate them or stifle more progression.
The alternative is stark; we will destroy incentives for businesses to improve materially. Metrics will become targets, with firms focusing on compliance, not progress. Businesses and investors will defer risk rather than invite sanction. We’ll likely see important but harder-to-quantify areas – like social impact investment – lose out to ones easily measured, like carbon reduction or zero waste targets. And ultimately, we will be the poorer for it.
The International Monetary Fund this month called for ‘proper regulatory oversight’ of climate-oriented funds