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Greenwashing risks in asset management

Staying one step ahead


To the point


  • Greenwashing is a key regulatory concern, so asset management firms must proactively manage this risk.
  • While greenwashing is conventionally seen as a conduct risk, i.e., the act of deliberately mis-selling or misrepresenting a product’s green credentials, it can be inadvertent due to non-standardized sustainability data and the unfamiliar terminology of the sustainable-investing landscape.
  • Incomplete sustainability data will likely remain a key challenge for some time; therefore, clear disclosures on limitations and the actions taken to address them can improve clarity for end-investors.
  • The responsibility for addressing this risk extends well beyond firms’ compliance and risk functions, with firm and fund boards needing to set firm-wide and fund-specific strategies. 


Greenwashing has been described by the UK government as businesses or investment funds making “misleading or unsubstantiated claims about environmental performance” of their products or activities. It is a growing regulatory issue in the UK, EU and globally, particularly given the rocketing investor demand for sustainable products. Regulators are concerned that pressure on asset management firms to compete in this growing and profitable market could drive them to exaggerate the positive attributes of sustainable products.


However, greenwashing may also arise if investment decisions are based on non-standardized and incomplete sustainability data, or the firm’s communications are unclear about how sustainability-related terminology applies explicitly to the firm and its funds. Using overly technical language to explain non-financial performance (e.g., reduction in carbon emissions) in ongoing reporting could also lead some end-investors, unfamiliar with new terminologies and metrics, to believe funds are having a more positive environmental impact than actually stated.


Mitigating the risk of greenwashing is a key aim of the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR). Asset management firms are seriously concerned about having to re-label their funds due to supervisory intervention, which may result in significant reputational risk. The industry expects further guidance from the European Commission and supervisory precedent from other national EU regulators on SFDR implementation once its level 2 regulations take effect in January 2023. Once there is sufficient supervisory precedent and regulatory examples of how categorization should work in practice, inappropriate categorization could also lead to regulatory penalties.

When can greenwashing occur?

Greenwashing can happen at any point of the fund and product lifecycle, which is divided into three main stages:

  1. The pre-contractual stage
  2. The post-investment and ongoing-reporting stage
  3. The complaints-handling stage

The table addresses firms’ key challenges in mitigating greenwashing risk at each stage and provides relevant regulatory requirements and actions that firms can take.

Fund/product lifecycle

Regulatory requirements/guidance

Actions for addressing key challenges





Pre-contractual stage

Financial Conduct Authority (FCA):

Requires that names, objectives, documented investment strategy and holdings be consistent; and

Requires comprehensive information on strategies and stewardship policies.


Requires disclosures on firm websites: sustainability due diligence, sustainability risk and remuneration policies; and

For Article 8 or 9 funds, the following disclosures are required on firm websites and pre-contractual documents: investment strategies, objectives, top holdings, due diligence, data sources and limitations to methodologies and data.

Obtain, analyze, and use sustainability data, which is often incomplete or infrequently available, to make investment decisions; and

Ensure that fund documentation and firm-wide policies provide clear and specific information in a non-technical way on the objectives and strategies of sustainable products, and whether there are data limitations and how they are being addressed.




Post-investment and ongoing-reporting stage


Suggests providing ongoing performance reports on how well a fund meets its stated objectives and any relevant information used to facilitate investment decisions; and

The profile of a fund’s holdings should always be consistent with its disclosed objectives.


Requires periodic disclosures on how environmental and social characteristics have been promoted (for Article 8 funds) or how sustainable objectives were attained (for Article 9 funds); declarations that no significant harm has taken place towards certain sustainable objectives (Article 9); and the fund’s top holdings and actions taken to achieve its objectives.

Have a strategy to deal with unexpected new sustainability data on investee companies in funds from various sources, potentially affecting the fund’s objectives.




Complaints-handling stage

FCA’s dispute resolution: complaints sourcebook (DISP) rules require firms to:

• Assess the subject matter of complaints fairly, consistently, and promptly;

• Consider whether the complaint should be upheld, and whether and what redress should be provided;

• Observe a time limit for responses, which should be fair, clear, and not misleading; and

• Maintain complaints-handling policies.


• Have policies and procedures in place for compliance or other relevant functions to properly investigate complaints related to greenwashing. This includes assessments against the FCA’s complaints-handling rules and determining whether compensation is required.


How can greenwashing risks be mitigated?

The responsibility for addressing greenwashing risk extends beyond firms’ compliance and risk functions. Firm and fund boards must consider this risk when setting up firm-wide and fund specific strategies. It is evident from recent regulatory initiatives that the FCA and EU regulators’ expectation is that firms will take a holistic approach towards mitigating greenwashing i.e. manage the risk at each stage of their business activity from product development to ongoing reporting and to involve all relevant functions.


The role of firm and fund boards

The role of portfolio managers

The role of compliance and risk

Pre-contractual stage:






1. Sustainability data

Set firm-wide sustainability data policies.


Enhance in-house capabilities to obtain, analyze and validate data;

Avoid relying on a single data provider and compare data from different sources to identify and resolve any discrepancies; and

Identify and disclose data limitations to control functions.

In conjunction with portfolio managers, undertake appropriate due diligence on third-party sustainability data and ratings providers;

Review sustainability data policies periodically and ensure data disclosures are up to date when data availability changes; and

Conduct periodic monitoring on fund documentation to assess whether data limitations have been made clear.

2. Clear communication

a.    Firm-wide information

Firm boards to sign off on firm-wide sustainability and engagement policies. This requires careful consideration of the tone used in such documents, the resources available for the sustainable fund offering, and the firm’s overall stance on sustainability.






b.    Fund-specific documents and disclosures

Fund boards need to ensure the fund strategies are aligned with firm-wide ones.


Ensure staff are trained on the prescribed technical thresholds under each of the FCA’s labels (when finalized);

Ensure sustainability-related disclosures can be easily understood by less sophisticated investors;

Ensure objectives and strategies are worded in an accessible way; and

Include data limitation disclaimers and issues that may hinder the fund from achieving the environmental impact promise.

Ensure documents are written in a non-technical manner and that there is sound evidence to support any claims regarding the fund’s non-financial objectives and associated financial returns;

Flag any risks of exaggerated language or not aligned with the firm’s overall tone or approach to sustainability; and

Perform a spot check that the information in prospectuses is consistent with that on the firm’s website and in firm-wide policies.




3. Investment strategy

Consider the firm-wide strategy for sustainable investing, which must be made clear in firm-wide policies; and

Ensure the firm-wide strategy is incorporated into the fund-specific strategies.

Exclusions/negative screening

Clarify whether exclusion is based solely on the company’s activities or includes other entities in its supply chain.

Best-in-class investing

Clarify the limitations of using ESG ratings for investment decision-making.

Thematic and impact investing

Specify funds’ objectives and time horizon to achieve these, and events that these are contingent upon.

Monitor whether holdings and allocation percentages in funds are compatible with the fund’s stated objectives; and


Monitor whether holdings and strategies are consistent with the firm-wide sustainable investment strategy set by boards.





4. Third-party distribution

Approve the overall strategy and parameters for how the firm works with third-party distributors; and

Set the firm’s overall risk appetite for engaging with third parties, e.g., the level of due diligence on third parties.

Provide additional training to the Independent Financial Advisors (IFAs), e.g., where new types of investment strategies are concerned or where there are uncertainties around non-financial performance and new sustainable investing terminology.

Review periodically whether up-to-date fund-specific documentation is made available to third parties.

Post-investment and ongoing-reporting stage:





1. Sustainability data

Consider whether to employ a strategy of third-party assurance on new sustainability data that emerges unexpectedly and could affect funds’ objectives.



Scan and identify information that emerges from a variety of different sources about the investee companies, and have the requisite relationships with data providers that can promptly update them; and

Assess proactively whether any divestment or engagement must take place if new sustainability data emerges that affects funds’ ability to perform on sustainable objectives.

Review communications to ensure investors are informed of any changes to holdings in a timely manner;

Check whether any decisions regarding changes in investments have been explained clearly and that no exaggerated claims have been made regarding these changes; and

Undertake due diligence on the sources where new data has been received.





2.  Ongoing reporting

Ensure a consistent strategy about which non-financial metrics must be used and how they must be displayed.

Determine the right metrics to measure non-financial performance and ensure the metrics are understandable;

Inform intermediaries and end-investors about changes in strategies and objectives in sustainable funds proactively; and

Explain why non-financial performance is falling short of expectations or certain sustainability objectives, and what is being done to improve it.

Conduct periodic formal reviews to assess whether ongoing reporting documents are reporting performance accurately;

Carry out spot checks on performance data included in ongoing reporting documents against internal performance data; and

Assess whether claims, strategies and ongoing reporting for funds are consistent.  

Complaints-handling stage:


Ensure the boards see management information (MI) on the number of greenwashing complaints being received; and

Undertake a root cause analysis and, if need be, review existing firm-wide policies on sustainable investing.

Consider whether the approach or investment strategies can be amended, or whether the expected time horizon for achieving certain sustainability objectives must be amended, to prevent further instances of greenwashing complaints.

Compliance, risk, or other relevant departments must ensure they are trained in sustainability investing, sustainability data and related terminology and analysis, so that they can determine whether greenwashing may have occurred;

Investigate whether communication in fund documentation and websites was clear, appropriate and not exaggerated, and whether the sustainability data on which investment decisions were based had serious deficiencies and whether they were disclosed;

Ensure there is a robust analysis of whether the situation is within the definition of an FCA complaint (i.e., financial loss, material distress or material inconvenience), on what grounds, and whether financial compensation is required; and

Handle deliberate greenwashing as any other instance of serious misconduct.

Firms will benefit from strong governance structures and oversight from boards, senior managers and the control functions when identifying and managing any conflicts between staying competitive and providing accurate information to end-investors. They should also place themselves in the shoes of end-investors and consider whether their claims are clear, fair and not misleading, as a consumer-centric firm culture can help mitigate greenwashing risk.

*This article is an abridged version of the report by David Strachan, Natasha De Soysa, Felix Bungay, Isha Gupta and James Staight. It was abridged by Tiffany Tianjiao Yuan, Ph.D., CFA, FRM.



  • While greenwashing is conventionally seen as an act of deliberate misconduct, it can also inadvertently arise from incomplete data or new and unfamiliar terminology. Firms must incorporate controls against this into their overall risk management frameworks.
  • Essential to mitigating greenwashing risk is thorough fund documentation that draws explicit links between fund names, objectives and strategies, backed by clearly written and comprehensive firm-wide policies.
  • Collaboration between portfolio managers, marketing and sales functions, and compliance and risk functions is a must to ensure any misalignment between objectives and strategies, and the potential for confusion and exaggeration, are identified and addressed promptly.
  • Firm boards must consider the risk of greenwashing when setting firm-wide policies around sustainable investing.