Greenwashing, which generally refers to a company making false or misleading claims about the sustainability or environmental-friendliness of a product, is becoming more prevalent as consumers place greater priority on environmental, social, and governance (ESG) matters. Now, financial regulators in the U.S. and EU are reacting by introducing new regulations aimed at greenwashing.

In May, the U.S. Securities and Exchange Commission (SEC) proposed two new rules intended to promote reliable information for investors about a company’s ESG initiatives:

• The Names Rule would require funds with an ESG-related name to maintain at least 80% of their investments in the area identified by their name.
• The ESG Disclosure Rule would require funds to disclose their ESG strategies in brochures and annual reports and would require funds with an environmental focus to disclose greenhouse gas emissions associated with their investments. Notably, the extent of ESG disclosure for subject funds would depend on how central ESG matters are to a fund’s strategy.

European regulators are grappling with greenwashing as well. The EU’s Sustainable Financial Disclosure Regulation is expected to affect how a fund is classified and sold to investors. The overarching goal of the rule is to improve transparency around sustainable products and prevent greenwashing. This rule notwithstanding, regulatory scrutiny of greenwashing in the EU is becoming sharper. Just this week, a German asset manager resigned following a police raid stemming from claims that the fund misled investors about its environmental record.

As the recent actions by the U.S. and EU financial regulators indicate, the regulatory framework to combat greenwashing is evolving. And while there may be some uncertainty as to where the regulations will end up, companies should ensure that they are carefully considering how they represent ESG pledges to their clients and consumers.