Central Bank to Prioritise Green-Washing in 2020

Derville Rowland, Director General of the Central Bank of Ireland (the “Central Bank”) recently spoke about the Central Bank’s Priorities for 2020 which include a focus on climate change. The Central Bank advised of its role in tackling climate change in terms of;

1. market stability; this perspective covers two types of risk – (a) direct climate risks, such as those arising from physical risks (eg. fire, flooding or storm events), can threaten the value of assets owned and (b) transition risks, changes in legislation or consumer sentiment; and
2. the conduct perspective; a rise in mis-selling whereby consumers are mis-lead in to buying “green” or “sustainable” products which do not in fact meet basic environmental standards.

Sustainable Finance

The Central Bank is aware that there has been a substantial increase in the development of financial products specifically earmarked to be used for climate and environmental projects as part of the move towards sustainable finance (see here regarding the launch of Euronext Green Bonds on 5 November 2019). However, Derville Rowland has advised of the challenge for both the Central Bank and industry to ensure that sustainable financial products are defined in an accurate and transparent manner so that investors can trust what they are receiving. Ms Rowland referred to the recent agreement between the European Parliament and the European Council on the creation of the world’s first ever “green list” which forms part of the European Commission’s Action Plan on Financing Sustainable Growth. The taxonomy, or “green list” as it is being described, is the last of the European Commission’s package of measures which also includes (1) sustainability disclosure regulations relating to sustainable investments and sustainability risks and (2) amendment of the low carbon benchmark regulations (see more information here). This “green list” is a classification system which creates a basis for standards and labels for sustainable financial products in order for a product or activity to be considered environmentally sustainable.

What to Consider Now

The Central Bank has advised that “economic policy is increasingly focused on producing not just an effective economy but a sustainable and effective economy”.  Eco-friendly products have a place in our eco-conscious society and, put simply, green is good for business. However, it is clear that both at European and domestic level, legislators are asking financial firms to strive for greater economic sustainability.  The Central Bank has advised that it is important not just to understand the technical requirements of the incoming regulatory requirements but the underpinning objectives and spirit. With implementation of the various regulatory provisions scheduled for late 2021, in an area of financial regulation that is evolving rapidly, what can you do now to prevent green-washing? Consider the following:

• Give “Green” a clear definition. The definition of green and sustainable varies depending on the market so be clear in terms of what you’re offering;
  Engage third party verification for identification and evaluation. Corporate social responsibility reports and sustainability reporting are becoming more and more important. In order to enhance credibility, third party verification will add an additional layer of comfort for you and the end user;
• Consider environmental information disclosure. Disclosure obligations are scheduled to come into effect in January 2022 so consider the environmental information available, both positive and negative. There is a tendency for companies to selectively disclose only positive environmental information which will likely come in for criticism by the Central Bank at a later stage.

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