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IOSCO consults and recommends on the issue of greenwashing in the asset management industry

  • United Kingdom
  • ESG
  • Financial services and markets regulation - ESG
  • The future of funds - Authorised Funds
  • The future of funds - ESG


The International Organization of Securities Commissions (IOSCO) has published a consultation report (the “Report”) focusing on investor protection issues, including greenwashing and regulatory approaches to practices and disclosures for sustainability-related financial products. The Report is part of the overall framework for sustainability that IOSCO is developing with its members and other international organisations. 

In the Report’s accompanying statement IOSCO highlighted that the “race to promote green credentials” has lead to some worrying practices and “real action” now needed to be taken. In particular, the Report identifies that risk management practices within the asset management industry relating to the evaluation of the financial impact of sustainability risks are limited.


According to the Report, there are several types of greenwashing at asset manager and product level which need to be addressed by financial regulators:

  • Overstatements and unclear messaging about asset mangers’ commitments to sustainability including risks, opportunities, investment objectives and/or strategies
  • Failure of asset managers to meet sustainability commitments which they purport to meet, i.e. an asset manager which makes public commitments to sustainability disclosure frameworks but does not really comply with those frameworks on an ongoing basis
  • Lack of alignment between the product’s name and its investment objectives and/or strategies
  • Failure of a financial product to follow its own sustainability investment objectives and/or strategies
  • Misleading claims about the financial product performance and results
  • Lack of disclosure, i.e. investment strategies not disclosed or shareholder engagement, a product’s performance and results

Financial regulators’ approach to the supervision of sustainability-related products

Securities regulators have variously implemented approaches on a voluntary, comply-or-explain and mandatory bases.


Regulators have developed voluntary guidelines or stewardship codes to communicate their expectations relating to sustainability related issues in asset management, i.e. Japan and Singapore

Comply-or-explain approach

Other regulators require asset managers to explain their consideration to sustainability related risks or explain the non-compliance, i.e. Article 173-VI of the Energy Transition Law aiming at increasing disclosure of climate related and other ESG risks by financial institutions or the Financial Conduct Authority in the United Kingdom (FCA) requiring licensed firms to disclose their commitment to the Financial Reporting Council’s Stewardship Code on a comply-or-explain basis


Some regulators have imposed mandatory requirements through legislation or regulatory guidance which require asset managers to make disclosures on sustainability related products, i.e. Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (“SFDR”) in Europe, or the Fund Manager Code of Conduct (“FMCC”) in Hong Kong

Regulatory initiatives relating to sustainability related products

The Report states that financial regulators have applied the principle of proportionality for smaller and less resourced firms taking into account the workforce size, financial footprint, risk profile etc.  The Report also outlines some regulatory initiatives relating to governance, investment strategy, risk management and tools for sustainability related products, including:


The German regulator (BaFin) issued a guidance in December 2019 setting out expectations for the management board of institutions to develop an understanding of responsibilities allocation, risks and potential impact.  The guidance also states that stress tests may include sensitivity and scenario analyses to examine the entity’s ability to withstand adverse events or scenarios caused by physical and transition risks

Hong Kong

The financial regulator (SFC) launched a consultation to amend the FMCC  to require fund managers to take climate-related risks into consideration in their investment risk management processes


MAS issued guidelines to set out sound environmental risk management practices which asset managers may adopt including expectations for boards and senior management to maintain oversight of risk management and disclosure


The FCA requires asset managers to disclose their commitment to the Stewardship Code.  The FCA also published a consultation paper in June 2021 proposing mandatory entity and product level TCFD-aligned disclosure rules for asset managers, life insurers and regulated pension providers

United States

The Investment Company Act of 1940 requires a fund’s board to adopt written policies and procedures relating to sustainability-related disclosures and procedures as part of its compliance program


The Report has identified a number of challenges associated with the increase demand and offering of sustainability-related products:

  • Data gaps at the corporate level – inconsistent methodologies, unreliable and limited data and lack of a single framework in the market
  • Increase of data and ESG rating providers that provide data which lacks of reliability and consistency in ESG ratings as information they rely on is provided by the issuers themselves
  • Lack of a consistency in terminology, labelling and classification
  • Differing interpretation
  • Gaps in skills and expertise
  • Evolving regulatory approaches


Securities regulators should:

  1. consider setting regulatory and supervisory expectations for asset managers in respect of the implementation of practices and policies relating to sustainability risks and opportunities and related disclosure;
  2. clarifying and/or expanding on existing regulatory requirements or guidance or, if necessary, creating new regulatory requirements or guidance to help investors better understand products and associated risks;
  3. have supervisory tools to ensure that asset managers and sustainability related products are compliant;
  4. consider encouraging participants to develop a common terminology around sustainable finance;
  5. consider promoting financial and investor education initiatives.

What happens next

The expectation is that financial regulators should clearly define their expectations when it comes to practices and policies relating to sustainability risks and opportunities and related disclosures in the asset management industry.  It is clear that the FCA, as a key member of IOSCO, is already seeking to address the points raised by the Report, as the demand for sustainable and ESG investment funds in the UK continues to grow.  We only need to look at the recent output from the FCA to see this in action.  

The FCA’s Business Plan 2021/22, outlined a strategy of “promot[ing] integrity” in the sustainable investing market, as well as plans to introduce oversight of ESG service providers.  In addition, the proposed mandatory requirements to disclose climate related financial information in line with the task force of climate related financial disclosures (“TCFD”) and the FCA’s Guiding Principles, show that the FCA are keen to tackle the issues raised by the Report, in order to ensure the quality of sustainable funds reaching the market.

See our client briefings:

The recommendations set out in the Report have been put out to public consultation until mid-August.

How Eversheds Sutherland can help

The Eversheds Sutherland Financial Services team acts as both a trusted legal adviser and strategic business partner. Our international network of lawyers and former regulators counsel leading corporations, funds and financial institutions on the full range of transactions, regulatory and compliance issues.

For guidance on any of the points raised in this briefing, please get in touch