The DFSA’s approach towards the prevention of greenwashing

Regulators globally are taking steps to address the problem of greenwashing and in this article, we outline the approach taken by the Dubai Financial Services Authority (DFSA).

In its Business Plan for 2023-24, the DFSA (the regulator of the DIFC) states “[Our] work on sustainable finance, which started in 2019, intensified and accelerated in 2021 and 2022, with much further work planned for 2023 and 2024.”

This sentiment is reflected in the regulator’s Sustainable Finance Roadmap, which covers the period 2021-2024. One of the milestones on the roadmap relates to Sustainable Reporting and Disclosure and makes specific reference to the prevention of greenwashing.

In the DFSA’s  ‘Greenwashing Explainer’, published in April 2023, the regulator defines greenwashing as “claims by an organisation that misrepresent the sustainability features, action or impact of its activities, practices or products”.

Importantly, the Explainer makes clear that greenwashing “varies in scope and severity from confusing or inappropriate use of sustainability-related terminology to deceptive marketing practices and outright fraud”.

This distinction, between inaccurate use of terminology and fraudulent activity, is important since it recognises that greenwashing can be either negligent or intentional.

In other words, an unethical firm might intentionally seek to deceive customers or investors by use of marketing content which makes inaccurate, or simply false, claims about sustainability. However, an alternative, and perhaps more common, cause of greenwashing is a firm’s failure to consider carefully the claims it is making about the sustainability characteristics of particular products or financial instruments.

Having defined greenwashing, the DFSA’s Explainer goes on to provide the following examples:

• Describing an investment, or an investment fund, as green or sustainable when only a small part of the investment or fund’s objectives could be described as such.
• Reporting that an activity, product or service has delivered positive outcomes, i.e., “green benefits”, without having fully or properly verified that this is the case.
• Describing an activity, product or service as green or sustainable without monitoring and verifying outcomes, so that the environmental and sustainability benefits are not truly understood, achieved or demonstrated.
• Labelling a product, investment or project as having green, environmental or climate change prevention objectives but failing to allocate all or a part of the funds raised from investors to achieving these goals.

These examples are helpful as they reinforce the point that greenwashing takes many forms.

While it is common to think of greenwashing primarily in terms of a firm’s failure to ensure that its marketing claims are accurate (see the first example), the other examples given by the DFSA make clear that it can also be caused by failures in the monitoring, and verification, of outcomes. For example, a firm may intend a particular financial instrument to achieve certain sustainability goals but if it fails to monitor or verify the outcomes that are actually achieved, then the firm’s (well-intentioned) claims may still amount to greenwashing.

The final example illustrates that the risk of greenwashing also extends to the issuers of financial instruments, who are at risk of greenwashing if they fail to allocate funds raised in line with the sustainability claims made during fundraising. This final point is addressed in more detail in a separate DFSA Market Brief publication which considers sustainability disclosures in prospectuses.  

Given that greenwashing can take different forms, it is unsurprising that there is no single, simple, solution to the problem. However, the DFSA Explainer highlights three important elements to the prevention of greenwashing.

1. Transparency, which the DFSA describes as key to preventing greenwashing – “appropriate, clear and relevant corporate disclosures are a primary safeguard for investors and consumers that the information they receive is sufficient for taking informed decisions”.
2. The work of ESG (Environmental, Social & Governance) verification and certification bodies, as well as data providers. Their role is particularly significant given the “strong reliance on their independent expertise and insight by investors, regulators and the public”.
3. Education of investors. As the DFSA comments: “Although knowing how to identify greenwashing will not necessarily prevent it, more awareness amongst market players, including investors and consumers, may help them avoid being blind-sided by attractive-looking but empty ‘green’ claims that do not hold true.”

In conclusion, greenwashing is a multi-faceted issue. It can take many forms and can be either intentional or the result of negligence on the part of firms. The DFSA has expressed its intention to prevent greenwashing but it is important to recognise that this cannot be achieved solely by regulatory action. As the DFSA itself concludes:

 “Ultimately, combatting greenwashing involves efforts from all sides - not only from the regulators but also from the corporate and financial sectors, investors and consumers - to ensure that it becomes a practice of the past.”

If you or your firm require further training regarding ESG, sustainable finance and greenwashing, get in touch to discover more about our tailored eLearning modules or in-house courses for your front and back office staff, the Compliance Team, and Senior Management.

Nigel specialises in training boards, senior executives and other staff on the impact of regulation and regulatory change.

He is a CFA Charterholder and Chartered Fellow of the CISI, with over 20 years' of industry experience.

With a background in compliance in private banking and wealth management, Nigel has a particular interest in effective corporate governance and the management of compliance and regulatory risk. His interests also include issues relating to ESG and climate risk, conduct and culture (including non-financial misconduct), and all aspects of financial crime prevention, as well as the impact of fintech on compliance and regulation.

Recent assignments have included briefing multiple boards and executive teams on the Consumer Duty, delivering compliance and ethics training for senior managers and front-office staff and creating a user-friendly risk and compliance handbook for a major bank.