Imagine investing your hard-earned savings in a “sustainable infrastructure” fund only to find out that your money is propping up companies building new pipelines for fossil fuels or contributing to deforestation in the Amazon.
The EU’s competitiveness agenda is watering down some of the key rules designed to keep big business honest about its impact on people and the planet. This will make it harder for consumers to invest their money sustainably, but it’s not too late to introduce some guardrails to protect people from greenwashing.
Corporate accountability rollback
The European Commission’s proposed ‘Sustainability Omnibus’ is an attempt to simplify three Green Deal laws which lay the basis for corporate sustainability reporting.[1]
There were many ways to simplify these laws; for example, by requesting SMEs to only fill one standard form instead of multiple ones. Yet rather than choosing smart simplification, the proposal simply deletes and reduces reporting requirements without any assessment of their relevance for consumers. Unfortunately, fears that simplification could equal deregulation are becoming a reality.
Changes to these rules on corporate sustainability would mean that most big businesses would no longer have to reveal their impact on the environment or exposure to climate change.
Above: less corporate sustainability reporting could undermine the EU’s sustainability goals
The European Central Bank issued a warning about the potential impact of the changes on financial stability, investors and the EU’s sustainability goals. On top of that, the European Ombudswoman opened an inquiry to determine why the Commission did not have an impact assessment or public consultation for the proposal, as well as why the internal consultation was limited to 24 hours instead of the usual 10 days.
Undermining sustainable investment
For consumers who want to invest their savings in the climate and green transition, the changes in the Sustainability Omnibus will have a big impact. Banks, insurers, and investment managers rely on sustainability information that companies report to be able to propose “green” or “sustainable” products to consumers.
Banks, insurers, and investment managers rely on sustainability information
Without this sustainability information, it is harder to identify if companies are harming the planet or vulnerable communities. This will allow greenwashing as consumers are offered “sustainable” investment products that invest in unsustainable companies.
Guardrails to prevent greenwashing
In light of reduced reporting rules, another law becomes even more important to protect consumers from greenwashing: the Sustainable Finance Disclosure Regulation (SFDR), which the Commission is planning to review.
The SFDR covers what information finance companies have to disclose about the sustainable finance products they offer. The SFDR can be strengthened to protect consumers against greenwashing and ensure that money invested in sustainable finance supports sustainable companies.
While today, many investment products are wrongly called “sustainable,” in the future, consumers should be able to trust that the name of the fund matches its contents. The SFDR could help here by introducing two distinct categories of investment: “sustainable” (for those that do no harm to the environment) and “transition” (e.g. to help energy companies move away from fossil fuels).
Above: many funds are labelled ‘sustainable,’ but are they really?
To make a category system work, some basic rules must apply. Firstly, using sustainability-related phrases, like “green” or “ESG” in the product name and marketing should only be allowed for products in these two new categories. Otherwise, the SFDR will be ineffective in fighting greenwashing.
Furthermore, sustainable finance products should automatically exclude the most harmful companies, like fossil fuel companies or, for transition products, those opening new fossil fuel projects. Products should also meet a minimum threshold of sustainable assets, while setting environmental, social or governance-related targets for the investments., while setting environmental, social or governance-related targets for the investments.
Sustainable finance products should automatically exclude the most harmful companies
Finally, selling investments in the Transition category means the seller (e.g. the bank or asset manager) has to encourage the companies the product invests in to become more sustainable. Not doing so must have clear consequences, for instance, divestment.
Protecting consumers and supporting the green transition
As shown by widespread greenwashing practices – such as EU “green” funds investing €33bn in major oil and gas firms – the finance industry cannot be left to decide what is “sustainable” and what is not.
While investment in the green transition is growing, it remains far below the estimated level needed to meet climate targets. The Commission estimates an additional €477bn of public and private investment is required annually up to 2030 to facilitate the green transition. When consumers invest sustainably, their money must be safeguarded from greenwashing to ensure it reaches the right companies.
Consumer trust in green investments is also important for Europe’s competitiveness: the EU is trying to push Europeans to invest their money, rather than just keeping it in the bank. To motivate Europeans to invest, credible green investment options can be an important driver. With 62% of consumers demanding sustainable investing, we must ensure that consumers can get the investment products that they want.
[1] The Sustainability Omnibus makes amendments to the Corporate Sustainability Reporting Directive (CSRD), the EU Green Taxonomy, and the Corporate Sustainability Due Diligence Directive (CS3D).