In separate cases spanning both sides of the Atlantic, BNY Mellon and DWS, a subsidiary of Deutsche Bank, have been accused by their respective regulators of exaggerating their environmental, social and governance (ESG) credentials. BNY has been fined £1.5m for the mis-statements. DWS is facing enforcement action for similar offences. 

The issue of reputational risk for firms in similar positions is significant, after reports of raids by City of London Police on the UK offices of DWS hit the front pages of the financial press last month.

GaiaLens, an ESG analytics platform for institutional investors, commented that with the addition of the EU Sustainable Finance Disclosure Regulation (SFDR), which provides a reporting framework and process for ESG labelling of funds (Article 8, Article 9 etc), scope for being caught out for greenwashing will increase from next year. 

Armed with new enforceable regulations like SFDR, Seb Kirk, co-founder and CEO of GaiaLens, said: “We have scope for a major initial crackdown.”

How exposed banks and investment firms are to ESG fund mis-selling will depend on their book of ESG funds and what they have said about them. 

Alan Hughes, head of law firm Foot Anstey’s Retail Financial Services sector, said ESG mis-selling would be no different from other potential mis-selling, and claims could fall to the Financial Services Compensation Scheme. 

Compared to other areas of investing, however, what makes an ESG-eligible investment is currently more of a grey area, raising the risk of non-compliance.

Hughes said, as a result, investment managers need even more robust internal measures.

He said: “Compliance teams at any firm selling investments based on ESG credentials should be establishing their own systems, procedures and controls for doing so in a way which does not incur unnecessary mis-selling risk.”

For more on this subject, see the full article from the Financial Services Faculty here: Greenwashing – the next mis-selling scandal?