ESG regulations worst greenwash risk for firms: JPMorgan

FIRMS that make misleading statements about their climate strategies could face regulators’ harshest interventions, said JPMorgan Chase & Co analyst Jean-Xavier Hecker.

“Climate change is likely to become the environment, social and governance (ESG) theme where the crackdown on greenwashing will be the hardest,” said Hecker. He noted that scientific knowledge on climate change is “widely available, and points to the need for bolder and faster action”.

He said the development will probably impact some of the biggest climate coalitions, including the Glasgow Financial Alliance for Net Zero, as well as the Science Based Targets initiative and Climate Action 100+. These groups will likely face pressure to “level up their standards”, he added.

After years of exuberance around all things ESG, regulators across jurisdictions are collectively removing the punch bowl. As a result, financial professionals are growing considerably more circumspect around making ESG statements in general, with net-zero claims in particular triggering concerns of potential litigation. 

In Europe, where ESG regulations are the most advanced, asset managers are in the process of downgrading tens of billions of dollars worth of funds that tracked climate transition and Paris-aligned benchmarks. This came after stricter guidance from the European Union (EU). Fund bosses are no longer comfortable applying the EU’s top ESG designation to funds that track such benchmarks.

Hecker expected anti-greenwashing actions to go beyond disclosures, “to also include an assessment of the alignment between the fund’s stated investment philosophy and the final investment decisions”. He highlighted recent guidance from the European Securities and Markets Authority that sets minimum thresholds for ESG and sustainability claims as a further tightening of the screws on the industry.

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Overall, the development in the EU means that national regulators “may engage with fund managers by requiring explanations and/or documentation to validate the composition of their portfolio”, Hecker said. He added that this would be an “unprecedented” level of regulatory intervention in the ESG market.

He noted, however, that such an approach remains in line “with the more transformative approach adopted by the region on ESG regulations”. BLOOMBERG