Are green and sustainable investment products really as green as they say?

What is Greenwashing?

Greenwashing is when a company purports to be conducting its business in an environmentally conscious manner when in reality they are doing very little, if anything, to make a positive impact on the environment.

These companies spend significant resources on their marketing and advertising to promote their products as green but ultimately consumers and investors are misled and cannot trust the claims that are made. Greenwashing can apply to financial products, including so-called green investments, as it can to other products and services.

Clamp down

Set out in a recently published consultation paper, The Financial Conduct Authority (FCA) is proposing to implement a range of measures to clamp down on greenwashing. Sacha Sadan, the FCA’s Director of Environment Social and Governance (ESG), said:

‘Consumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector. This supports investment in solutions to some of the world’s biggest ESG challenges. This places the UK at the forefront of sustainable investment internationally. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.’ 

The proposed measures will seek to implement sustainability disclosure requirements, ensure financial products have the appropriate ‘green’ investment labels and restrict how sustainability-related terms are used in product names and their marketing. The consultation is open until January 25, 2023 and the regulator intends to publish final rules in early 2024.

In the UK, the Government has committed to achieve a net-zero economy by 2050. However, until then, companies and investment products are left to implement their own ESG strategies whether required by law or as a result of growing public pressure. Investors cannot always be sure that the environmental and sustainability claims on products they are being sold, are clear and supported by objective evidence. In some cases, a ‘green’ financial product might have been promoted or sold in a misleading or perhaps even fraudulent way and it might not be the green product you thought it was.

Is it a crime or a civil matter?

There will be times where consumers and investors fall victim to greenwashing – whether you have been sold an investment product purporting to invest in green and sustainable companies that hasn’t done so or where you have invested in a product which was advertised to you as being more green or eco-friendly or sustainable than it really was. Inevitably, such mis-selling is likely to continue well after the FCA’s proposed new rules and may amount to a criminal offence.

Given the novelty of the issue being faced, combined with the restrictions on police and FCA resources, victims who report the matter to State authorities may well be told that their complaint will not be investigated due to lack of resources or because it is viewed only as a civil matter. However, the constitutional right to bring a private prosecution may well provide an option to companies and individual investors to investigate and prosecute where they have been persuaded to invest in a product based on green credentials which have turned out to be false. There are a number of offences that might arise, under the financial services, fraud or company legislation, for example.

Section 6(1) Prosecution of Offences Act 1985 provides the right for individuals and companies to bring a private prosecution.

Private prosecutions can be quicker, more focussed and more efficient than public prosecutions, especially in cases involving fraud.

As private prosecution specialists, Edmonds Marshall McMahon has an experienced team of senior investigators and prosecutors who are able to explore this option with you.

Natalie Tenorio-Bernal