Investors who want to invest sustainably often do not receive the information to which they are legally entitled. Anyone offering investment products is required by law to provide a good explanation of how ‘green’ they are. Such information is usually there, but often not very concrete, difficult to understand, or sometimes even contradictory.
These conclusions come from the Netherlands Authority for the Financial Markets (AFM), which investigated compliance with transparency rules on sustainability in the financial sector. Banks, insurers, pension funds, asset managers and investment funds were investigated, among others.
Although the law requires precise information, the AFM still sees a lot of ‘vague language’ and ‘repetitions of the same texts’. The information is also ‘often general’, making it unclear to investors whether the information relates to a specific investment product or to the company as a whole. Sometimes the information that can be found is even “contradictory”.
The AFM is not going to enforce it immediately, but wants to ‘discuss it’ with the sectors. What matters, the regulator says, is that the legislation is relatively young: since March last year, these institutions have had to comply with the Sustainable Finance Disclosure Regulation (SFDR). Before this regulation, it was even more difficult for investors to understand just how ‘green’ their investment is. Banks and investors each had their own method and reports on the sustainability of their product.
greenwashing
Although compliance with the current rules still leaves something to be desired, even stricter rules are on the way. As of 1 January 2023, even more specific requirements will apply about what financial players must say about their sustainable products. For example, it becomes mandatory to state which percentages of the investments meet sustainable criteria.
Green investing is a huge growth market. Many investors like to make sustainable investments, says Natalie Aartsen, head of the Lending, Savings and Retail Investing department at the AFM. “But they often didn’t know what to look for. More than For example, 30 percent even went off alone on things like the name of a fund, or how green the website is.”
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An important caveat to the new rules is that investors are still not sure whether their investment is really ‘green’. The AFM did not investigate whether the sustainable claims about investments are actually fulfilled in practice. The regulation only concerns the question of whether there is sufficient and clear information about investment products on the website.
In practice, there are still few rules for the financial sector to greenwashing (with companies making hollow green claims). “Another factor is that there are few international agreements about what we actually mean by sustainability,” says Zoë du Chattel, supervisor at the AFM. “Everyone has their own ideas about what sustainability is exactly. For example, some countries see nuclear energy as something sustainable, while others do not see it at all.”
Dark green
A new, different regulation is a tentative step in this direction. This concerns the European Taxonomy Regulation that has recently entered into force in part. This provides a list of criteria with which institutions can determine which part of their investments is ‘environmentally sustainable’. But institutions can also call investments sustainable without meeting these criteria, provided they provide an explanation. The AFM saw that organizations are often not yet able to indicate whether they are investing in accordance with this Regulation.
Despite the loopholes in the current legislation, the AFM does see some shifts, says Du Chattel. “Last year we saw that many investment funds called themselves ‘dark green’, in other words, claimed that they were fully focused on sustainability. We saw that some of their investment products turned out not to live up to that at all, so we were critical of that. It now appears that a significant proportion of those funds have adjusted that claim. They now know that you cannot just say that you are pursuing very sustainable goals.”