Sustainability issues are becoming increasingly prominent in the communications of listed companies and managed funds. Such communication must be consistent and accurate and must not mislead investors and other stakeholders. If there is a gap between what is communicated and what is actually done, greenwashing concerns will quickly emerge.
Greenwashing refers to the practice where a company makes exaggerated, misleading or false claims about the environmental benefits or sustainability of its operations, products or services. In most cases, companies aim to be environmentally responsible and strive to communicate this commitment to their stakeholders. However, communication becomes problematic if a company has not taken sufficient steps to achieve its sustainability objectives. Misleading sustainability claims can influence consumers, competitors, investors, financiers and other stakeholders.
Greenwashing is a prominent issue in consumer marketing today, in particular with the recent adoption of the Directive on empowering consumers for the green transition and the proposed Green Claims Directive. Greenwashing is increasingly becoming a significant issue in corporate communications. With the rise of sustainable investing, financial supervisors around the world have recently started to tackle greenwashing.
Financial authorities are cracking down on the greenwashing phenomenon
In many countries, supervising authorities regularly check environmental claims and information in prospectuses, websites and marketing communications, among other things. The European Securities and Markets Authority (ESMA) has published the Final Report on Greenwashing, which is ESMA's response to the European Commission's request for input on greenwashing risks and the supervision of sustainable finance policies. The aim is for supervisors to step up in ensuring investor protection and market integrity against greenwashing risks. In Finland, the Finnish Financial Supervisory Authority conducted a thematic review in 2023 on how greenwashing risks are taken into account by investment service providers in their marketing.
In other countries, supervisory authorities have paid particular attention to sustainability disclosures in prospectuses. The ESMA guidelines are based on the requirement under the Prospectus Regulation according to which a prospectus shall contain the necessary information which is material to an investor for making an informed assessment of the assets and liabilities, profits and losses, financial position, and prospects of the issuer and of any guarantor.
ESG factors, i.e. environmental, social and governance circumstances can also constitute specific and material risks factors for the issuer and its securities and, in that case, should be disclosed. With the introduction of the Corporate Sustainability Reporting Directive (CSRD), the information presented in a company's sustainability reporting must also be taken into account when assessing the materiality of the information. The information given in a prospectus must not be inaccurate or misleading, i.e. sustainability claims must be substantiated and the information must be as objective as possible. Sustainability-related matters presented in a prospectus must be understandable. For example, technical terms related to sustainability must be clearly defined. Elsewhere in the world, for example, the Australian Securities and Investments Commission has required an energy exploration company to remove claims of energy 'cleanliness' from its prospectus and a mining company to disclose more details and background information on the environmental and sustainability aspects of its 'low carbon' processing technology in a supplementary prospectus.
The communication of a listed company must be accurate and all claims must be verified for correctness
In an efficient market, the price of a company's share is determined by the information available to investors. New information may be considered material to a listed company's share if reasonable investors can be expected to change their perception of the fair price of the company's share as a result of the new information. From an investor's perspective, the information required under the disclosure obligations of a listed company is considered particularly relevant. With the introduction of sustainability reporting as part of a listed company's regular disclosure obligations, the role of sustainability information in a listed company's disclosure obligations has become greater and clearer.
In all its communications, a listed company must seek to ensure the accuracy of the information it publishes and that it gives the company's shareholders, investors and other stakeholders a fair and accurate view of the company. Listed companies may not make unfounded or inaccurate claims in their stock exchange communications.
As corporate responsibility activities are often characterised by a certain forward-looking ambition, communication about such ambitions must pay particular attention to ensuring that the stated ambitions are not unrealistic and that the company has genuinely taken steps to achieve them. Thus, where a listed company makes claims concerning carbon neutrality, net zero, climate targets or emission reduction, these targets and claims must be clearly substantiated by actual actions and realistic and truthful plans.
Listed companies have an obligation to provide information to investors in a transparent and honest manner. This is particularly the case where the information is likely to have a material effect on the value of the share. For example, a clearly stated ambitious target to reduce emissions by a certain year may give the impression that the company is leading the way and intends to make significant investments to achieve the targets, but the target can easily be considered to lack a sufficient basis in truth if no concrete actions to actually achieve the target can be demonstrated. The announced net zero target requires that it will be continuously supported by a concrete climate change transition plan, prepared in accordance with the ESRS standard and included in the sustainability report under the Corporate Sustainability Reporting Directive. In the future, the requirements of the Corporate Sustainability Due Diligence Directive (CSDDD) will also need to be taken into account.
Caution in responsibility communication
Many companies have publicly highlighted their ambitious carbon neutrality targets and the sustainability work they are doing. However, such claims must be backed by objective and reliable data and cannot be based on guesswork or purely communicative assumptions. In the absence of sufficient concrete evidence, there is a risk that the stated objectives and claims will be easily interpreted as unfounded and that even positive corporate actions may be questioned as greenwashing.
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