On 15 November 2024, the Luxembourg Commission de Surveillance du Secteur Financier (the CSSF) released a communication to warn the general public about greenwashing risk when investing in financial products. To this end, the CSSF is launching a new dedicated section on its platform www.letzfin.lu (the Letzfin Platform) addressing the growing interest in sustainable financial products and the greater need for awareness.
This initiative aims to educate and protect individual investors in the face of increasing green investment opportunities and the potential risks of greenwashing.
In its communication, the CSSF defines "greenwashing" as "a deceptive practice whereby some companies present themselves as more sustainable than they actually are, misleading investors into believing that their money is being used to benefit the environment, when this is not always the case".
While calling on individual investors to remain vigilant, the CSSF invites them to be critical and not to blindly rely on labels and sustainability promises, and provides several key recommendations:
- The fact that the name of a financial product mentions some sustainability-related term does not automatically mean that these characteristics are fulfilled. It is therefore important to thoroughly examine each financial product's green characteristics;
- Vague sustainability promises should be scrutinised and sustainability reports should be reviewed to make sure that concrete actions are taken to achieve the stated goals;
- The credibility of any mentioned green label or certification should be independently verified;
- A diversified portfolio of investments can help mitigate the risk of exposure to greenwashing; and
- Seeking advice from financial advisors specialising in sustainability can help investors select the appropriate financial products.
On the Letzfin Platform, the new section is designed to provide valuable resources and information to help investors navigate the complexities of sustainable investing, including inter alia educational materials, tools for assessing green investments, and up-to-date information on sustainable finance regulations and best practices. Some key elements are worth noting:
- On the Letzfin Paltform, the definition of
"greenwashing" is closely related to the common
understanding published by the European Supervisory Authorities in
their progress report on
greenwashing1 i.e. "a practice where
sustainability-related statements, declarations, actions, or
communications do not clearly and fairly reflect the underlying
sustainability profile of an entity, a financial product, or
financial services."
This definition is broad and covers all types of greenwashing, including unintentional greenwashing, and at different stages of the business cycle of financial products or services.
- Explanations on other related terms are also given. For
instance, "greenhushing" (or "strategic
silence") is used to refer to the refusal to communicate about
the true level of sustainability of a product due to the fear of
not doing enough or of losing investors fearing lower
profitability, whereas "greenwishing" refers to the
situation where ambitious sustainability goals are set and hardly
met by the business. A list of different terms is available on the
Letzfin Platform.
- An educational video and set of FAQs are available to address
key questions in the investment decision, such as:
- How to recognize greenwashing? Recommendations focus on the different strategies used (eg. use of misleading terms, inaccurate, vague or incomplete information, lack of concrete proofs, etc.);
- How can greenwashing be sanctioned? Sanctions are based on misleading commercial practices. However, it is noted that even if the practices are not sanctioned, greenwashing will likely impact the reputation of the entity against which greenwashing allegations are pursued; and
- How to assess if a product is really sustainable? Investors are recommended to assess (i) what the sustainable objectives are, (ii) what criteria are used to measure the sustainability, (iii) whether the objectives are really attained, and (iv) whether there is the intervention of a third party to validate the information.
Although aiming to be educative and to raise investors' awareness, the communication of the CSSF confirms the willingness from the regulator to fight against greenwashing behaviours and ensure a sound sustainable financial market within Luxembourg and beyond.
To consult the new section on the Letzfin Platform, please click here.
Footnote
1. ESMA progress report of 1st June 2023 ESMA30-1668416927-2498 Progress Report on Greenwashing
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
