ESG: how to wipe out greenwashing

ESG: greenwashing

EU authorities want to create quality labels for funds to stop investors being misled by false or exaggerated claims about ESG credentials. By Christiane Conrads and Luisa-Christin Hermann.

More regulation does not always mean more security. Currently there are many new environmental, social and governance (ESG) regulations and it is not surprising that several of them are subject to wide interpretation. Often, this has been not been taken seriously enough and turned into (accusations of) greenwashing.

To avoid greenwashing allegations, market participants should choose a thorough approach that ensures improvement in environmental and social standards and closely obeys such rules. Even those companies and funds that are ambitious in matters of sustainability face accusations of greenwashing, and this indicates that market participants should disclose only that with which they comply, supported by sufficient evidence.

In not doing so, companies face not only severe reputational damage, but also fines and damages.

The topic of greenwashing, in relation to sustainable investment funds, has been much discussed. As public awareness of the issue grows, companies are subject to increased scrutiny from consumer associations, their peers, other stakeholders and ordinary citizens.

More-stringent regulations have developed in tandem with greater public awareness. This dual pressure is set to be a catalyst for increased compliance; it will be within a company’s own interest to not only act in accordance with the law, but also to be seen doing the right thing.

The EU Taxonomy Regulation describes greenwashing as the practice of gaining an unfair competitive advantage by advertising a financial product as environmentally friendly even though basic environmental standards are not met. 

Misleading advertising

The requirements for the inadmissibility of certain advertisement claims are not entirely new. The law against unfair competition (UWG) in Germany, which implements existing European requirements, already regulates the misleading advertising. However, unlike in other EU countries, the law does not yet contain any explicit bans on certain sustainability-related claims. Instead, so far, courts have taken on the task of interpreting these undefined legal terms.

The courts apply a strict evaluation standard. General and absolute statements that a product is “environmentally friendly”, “green” or “climate neutral” are therefore directly inadmissible if they cannot be substantiated. It was only recently that the competition watchdog obtained two rulings that advertising with the term “climate neutral” results in an obligation to provide relevant information, ie, details as to how this  will be achieved.

The inadmissibility of greenwashing is also sanctioned under capital market law. Market manipulation can be sanctioned as an administrative offense, as well as a criminal offense if it is proven to have been committed intentionally. The German Securities Trading Act (WpHG) sanctions the dissemination of false or misleading signals that can influence the price of a financial instrument. Since statements regarding the sustainability of an investment always have the potential to influence price, greenwashing is therefore sanctioned by law.

The German law contains numerous ways of holding companies and their agents accountable in the case of greenwashing claims and ensuring their liability. However, there is one significant problem to which all those laws have not been able to provide a satisfactory solution: the courts must often interpret the terms “sustainability”, “environmentally friendly”, “green” and “greenwashing” themselves. This leads to differing interpretations and a high level of legal uncertainty for all economic stakeholders.

Bafin’s draft directive

Last year, the German Federal Financial Supervisory Authority (BaFin) published a draft directive that, for the first time, set out quantifiable requirements for sustainable investment funds.

Under the directive – suspended until further notice because of the energy crisis and geopolitical tensions – future investment assets may only be marketed as sustainable if the investment conditions stipulate that: a minimum investment quota (75%) in sustainable assets is observed; a sustainable investment strategy is pursued; or a sustainable index is tracked.

ESMA’s ‘quality label’

The EU’s determination to tighten rules protecting investors from greenwashing should therefore provide much-needed clarity and certainty in Germany as well. The European Securities and Markets Authority (Esma) has a strong interest in creating a “quality label” that would help ensure investors are not misled by ESG claims and disclosures.

However, ESMA believes the existing disclosure requirements for ESG benchmarks are not sufficient to harmonise the methodology and that minimum standards would be a supportive tool against greenwashing, which it describes as “exaggerated promises of sustainability”.

To improve clarity and transparency, ESMA is calling for an obligation that providers label existing categories of climate-related benchmarks with an appropriate abbreviation and align the specifications with other regulatory frameworks.

Web of regulations

The EU is also planning additional measures to combat greenwashing, the first of which is a tightening of the EU Directive on Unfair Commercial Practices. This would compel member states to change their respective legislation to account for the new rules.

This web of regulations by numerous participants in this sector presents companies with a complex and ever-changing challenge, exacerbated by financial supervisory authorities spending large amounts of time and effort on detecting greenwashing.

Consumer protection associations (such as Verbraucherzentralen) are constantly monitoring potential rule violations by well-known companies. Market participants should therefore ensure that they can substantiate any sustainability claims they make (and not just chose the easiest interpretation possible), or risk accusations of misleading investors.

Further, the names of products and services should not be misleading. Sanctions for greenwashing can be severe. Accused companies might have to pay compensation for damages (to investors or clients) and/or fines, and restoring any sustained reputational damage typically comes at a steep price.


Navigating the field of ESG regulation can be extremely difficult, meaning that conducting a thorough approach and obtaining professional advice is highly recommended.

In addition to complying with ESG regulations, the goal of avoiding greenwashing influences a company’s ESG strategy, which can include the product classification in accordance with the EU’s Sustainable Finance Disclosure Regulation (SFDR). For example, the requirements for an Article 9 fund under the SFDR are very ambitious and fund managers should be extremely diligent in their fulfilment. Only an elaborate ESG strategy creates a clear path towards achieving an ESG-compliant business and eradicating the risk of reclassification and greenwashing allegations.

Key takeaways

  • Only disclose and market what you actually fulfil and where you have sufficient (documented) proof;
  • Names of products and services should not be misleading;
  • Greenwashing is a key topic in all ESG projects and starts at an early strategy-development phase;
  • There are many new regulations regarding ESG and it’s only natural that several of them are subject to interpretation. To avoid greenwashing allegations, market participants should choose a thorough approach that ensures an improvement in environmental and social standards;
  • In addition to increasing regulatory requirements, stakeholder demands are also an important focus. Furthermore, consumer protection associations spend a lot of time and effort on detecting greenwashing by well-known companies;
  • Greenwashing allegations carry enormous risk. In addition to claims for compensation and/or fines imposed by supervisory bodies, companies risk exposure in the media and therefore bear a high risk or reputational damage, which is often very hard and costly to restore.

Christiane Conrads is Global Real Estate ESG Leader at PwC; Luisa-Christin Hermann is Senior Associate, ESG Real Estate at PwC