‘Greenwashing’ by asset managers and other entities can leave trustees exposed to legal, regulatory and reputational risk, a law firm has warned.

It comes after some high-profile campaigns have highlighted investments into fossil fuel companies made by asset managers and pension providers, despite claims of low carbon and sustainable approaches.

Most recently, the Make My Money Matter campaign highlighted 12 of the UK’s biggest pension providers and claimed there was a “persistent failure” across the industry to address climate change concerns.

Kate Granville Smith, a director at law firm Burges Salmon, warned that greenwashing poses significant risks to trustees.

However, by understanding these risks and implementing robust management strategies, trustees can navigate the complexities of environmental, social, and governance (ESG) reporting and maintain the trust of their stakeholders, the pair said.

Granville Smith said: “Trustees must remain vigilant to the potential for greenwashing in both the information they receive and the information they disseminate. It is crucial that they comprehend the significance of performing due diligence in their investment decision-making processes.”

Trustees should ensure their public statements around ESG matters are clear and unambiguous, are not misleading or overstated, can be independently verified and corroborated by underlying evidence, and are consistent with applicable disclosure requirements.

Granville Smith added: “If members do challenge the information that trustees have published, the key thing is to ensure that there is an audit trail for advice. Trustees aren’t expected to be climate or investment experts, and can reasonably rely on advisers, but trustees should also have the necessary knowledge and understanding to be able to challenge advisers.”

Regulators seek to address greenwashing

Granville Smith said an increased focus on greenwashing and ESG disclosures was consistent with the approaches of regulators such as the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR).

The FCA recently introduced its Sustainability Disclosure Requirements, aimed at reducing the risk of greenwashing by standardising sustainable investment labels for investment funds as well as additional disclosure obligations.

Meanwhile, TPR’s guidance includes a step-by-step guide to climate change investing and reporting, as well as introductory training on greenwashing and how it might be identified and addressed by service providers and investment products.

Granville Smith cited TPR’s own net zero report from last year, which acknowledged the “difficult balance to be struck” when communicating a sustainability strategy.

“We do not wish to be greenwashing and making bold claims relating to our positive impact on the environment that are without basis,” TPR stated in its report.

‘Greenhushing’ concerns

TPR also said it did not want to risk “greenhushing”, which would mean saying nothing on issues relating to environmental sustainability “for fear of criticism”.

Granville Smith said this was a legitimate concern as organisations may wish to avoid controversy and so elect to remain silent on ESG or sustainability issues.

“However, increased mandatory reporting obligations are likely to limit the space for greenhushing,” she said.

“Equally, as disclosure requirements become more rigorous, the quality of ESG reporting should improve and, in turn, diminish the risk of greenwashing.”