Are you playing the green game? A few words on the dangers of greenwashing

Greenwashing, the act of misleading consumers by providing false or distorted information about the environmental friendliness of products or a company's actions, is becoming an increasingly pressing issue. Such practices are in breach of the law and ethical standards, and, ultimately, harm the collective interests of consumers.

The essence of greenwashing and its facets

In a time when the consequences of climate change are becoming more tangible, many consumers are striving to make more environmentally conscious choices in their daily lives, which includes their financial decisions. In response to these changes, the financial market is beginning to offer products related to sustainable development and social responsibility, such as "green" investments and "green bonds." However, with the growing interest in such products, the threat of greenwashing emerges – dishonest practices through which issuers or financial institutions present their actions or products as more environmentally friendly and sustainable than in fact they are.

Greenwashing, like misselling, lacks a statutory definition. Consequently, it can take various forms and occur at different stages of a company's operations, from presenting itself as "green" to inadequately disclosing the risks associated with its operations and their impact on sustainable development.

The customers of financial market who seek sustainable products are vulnerable to such practices, which can undermine their trust in the capital market and such products.

Greenwashing under national laws

According to Article 24 of the Consumer Protection and Competition Act of February 16, 2007 (hereinafter CPCCA), it is prohibited to engage in practices that violate the collective interests of consumers. Such practices are deemed to be actions by entrepreneurs that contradict the law or ethical standards, particularly: (i) failing to provide consumers with accurate, truthful, and complete information; (ii) engaging in unfair market practices or acts of unfair competition; (iii) offering to consumers financial services that do not meet their needs as determined on the basis of the information available to the entrepreneur, or proposing such services in a manner that is not commensurate with their nature.

Greenwashing itself may constitute an unfair market practice under the Combatting Unfair Commercial Practices Act of August 23, 2007 (hereinafter referred to as the CUCPA). According to Article 4, paragraph 2 CUCPA, such a practice may involve deceptive actions, particularly if these actions, in any manner, induce or could induce an average consumer to make a decision regarding an agreement that they would not otherwise have made. Meanwhile, Article 5, paragraph 2 of CUCPA provides a non-exhaustive list of such actions, including disseminating false information, disseminating true information in a manner that could be misleading, actions related to introducing a product to the market that could lead to a mistaken interpretation or evaluation of the products or their packaging, trademarks, trade names, or other designations identifying the entrepreneur or their products, or failing to comply with the code of good practice, provided that the entrepreneur has voluntarily agreed to enter into such.

Greenwashing in the financial market and beyond

Greenwashing practices are not limited solely to the financial market but also to products that consumers purchase on a daily basis. In response to these practices, EU legislators are working on regulatory changes that are to better protect consumers from such dishonest actions.

Greenwashing practices in the financial market may not only involve presenting institutions or products as more environmentally friendly than they actually are but also, as previously mentioned, through inadequate disclosure of associated risks or their impact on sustainable development.

For investors who make their investment decisions on the basis of information about products or issuers, such practices can lead to unfavourable consequences such as financial losses or harm to the environment. Therefore, protecting consumers from greenwashing is a key component in building trust in the financial market and sustainable investments.

Combating greenwashing worldwide

To combat greenwashing, various regulatory institutions around the world are developing appropriate regulations. Many European regulators, such as the UK's Financial Conduct Authority (FCA) and Germany's Bundesanstalt für Finanzdienstleistungsaufsicht (BAFin), are taking action to prevent such practices. These organizations are preparing guidelines for investment fund managers to integrate ESG (Environmental, Social, Governance) principles into the investment process. At the international level, the U.S. Securities and Exchange Commission (SEC) established a Climate and ESG Task Force, dedicated to identifying inaccuracies when a disclosure of climate risk information occurs.

In addition to regulatory efforts, financial institutions themselves can take action to avoid greenwashing. They must first comply with mandatory disclosures under Regulation (EU) 2019/2088 of the European Parliament and of the Council of November 27, 2019, regarding the establishment of requirements for sustainability-related disclosures for investment products in relation to insurance and pensions (known as SFDR). These requirements ensure transparency at both the product and entity levels.

Promoting a strong ethical culture within an organization and adhering to market standards and best practices are also crucial. Another key element is conducting reliable customer preference surveys regarding sustainable development.

What organizations should remember

Control plays a pivotal role in identifying greenwashing within an organization. Therefore, when assessing a product or service, it is advisable to use a check list that verifies whether presented information aligns with the company's actual practices. Proper product design procedures and control environment can assist in mitigating the risk of being accused of greenwashing.

In summary, eliminating greenwashing is a crucial task for regulators, financial institutions, and businesses alike. This practice violates the collective interests of consumers and is contrary to the existing laws.

The accuracy of information, responsible communication, and compliance with existing regulations are key to ensuring the protection of consumer interests and building trust in the products and services offered on the market.

Let us not forget that awareness and education of investors, financial institutions, and regulators are vital components in the pursuit of more responsible and sustainable investments in the global financial market. Only in this way can greenwashing be effectively combatted and trust in the capital market and sustainable investments built.