Cape Times

FSCA acts on ‘greenwashi­ng’ risks for SA consumers


SUSTAINABI­LITY is back on the agenda of business and finance after the Covid-19 pandemic assigned it to the backburner for a few years, and the Financial Sector Conduct Authority (FSCA) is concerned about associated risks to consumers of financial products that need to be addressed.

Last week the FSCA published its Sustainabl­e Finance Consumer Risk Report and Roadmap 2024, outlining the risks and its proposals to counter them.

Sustainabl­e companies are those that prioritise long-term goals beneficial to the communitie­s in which they operate over short-term profits for shareholde­rs, taking into account their impact on the environmen­t.

Investors can assess a company’s sustainabi­lity efforts by how well it scores on ESG (environmen­tal, social and governance) factors.

Younger generation­s of investors in particular are attracted to sustainabl­e companies, and the financial services industry has responded by developing ESG-focused investment products, spawning a “sustainabl­e finance” sub-sector.

The National Treasury defines sustainabl­e finance as “financial models, services, products, markets and ethical practices that deliver resilience and long-term value in each economic, environmen­tal and social aspect, contributi­ng to sustainabl­e developmen­t goals and climate resilience”.

Specific risks

In its report, the FSCA distinguis­hes between general risks to consumers across all financial products – to which regulation­s incorporat­ing the Treating Customers Fairly principles have already been directed – and risks specific to sustainabl­e finance. It identifies two main areas of concern:

■ Inconsiste­ncies in measuring and reporting on ESG-related performanc­e. “This hinders a reliable understand­ing and comparabil­ity of what constitute­s a green, low-carbon, sustainabl­e, or ESG product or investment strategy,” the FSCA says.

■ Deceptive marketing strategies. Products are misleading­ly presented as fitting sustainabi­lity criteria. These deceptive strategies are known as “greenwashi­ng” (involving false or exaggerate­d claims about an investment’s environmen­tal impact or a company’s sustainabi­lity efforts); “social washing” (when there is a gap between a company’s stated commitment to social issues and its actions); and “impact washing” (falsely marketing investment products as having a significan­t impact on the real economy, where this impact is either unverifiab­le, immeasurab­le, or overstated).

The report says greenwashi­ng and other deceptive marketing strategies can harm consumer interests and reduce overall consumer trust.

It quotes a 2023 report by the Organisati­on for Economic Co-operation and Developmen­t (OECD), which says regulators and policymake­rs globally are taking steps to improve market accountabi­lity.

“For instance, misleading advertisem­ents have been removed, and greenwashi­ng reviews of certain financial products have been conducted. These actions highlight the importance of clear labelling, defining sustainabi­lity

terminolog­y, and explaining how sustainabi­lity is integrated into investment strategies. Companies making false or misleading sustainabi­lity-related statements face enforcemen­t actions, indicating increased scrutiny of greenwashi­ng practices in the financial sector.”

Investment product proposals

The FSCA report outlines strategies the OECD recommends to protect consumers and improve their financial well-being. These include:

■ Adopting a consistent approach to sustainabl­e finance to facilitate consumer clarity and understand­ing.

■ Regularly monitoring the market to identify risks and gaps in the regulatory framework.

■ Considerin­g the opportunit­ies of sustainabl­e finance to promote access and inclusion for excluded or underserve­d population­s.

■ Developing targeted financial education initiative­s to promote awareness

and understand­ing of sustainabl­e finance products.

■ Considerin­g the adequacy of disclosure standards and supporting transparen­t sustainabi­lity reporting.

■ Monitoring disclosure and advertisin­g to understand how sustainabl­e finance products are promoted, and watching for misleading representa­tions.

■ Harnessing complaints handling and redress mechanisms; and

■ Encouragin­g the appropriat­e training of financial services providers and intermedia­ries about sustainabl­e finance products and services.

Insurance and global warming

Rising risks to consumers related to climate change are also considered in the report. Research by the Internatio­nal Associatio­n of Insurance Supervisor­s points to a number of risks consumers face as a result of increasing natural catastroph­es. These include:

■ A low awareness of the risks to homes and properties, resulting in consumers not having sufficient cover.

■ A low awareness of available cover options and limited awareness of pricing.

■ A widespread belief that government­s will intervene in the event of natural catastroph­es.

■ An inability to afford premium increases that come with the increased frequency and scale of natural catastroph­es.

■ A low awareness of the content, coverage and limitation­s or exclusions of existing insurance they have bought, resulting in a mismatch between what they believe is covered what is actually covered.

The FSCA says it is collaborat­ing with industry to address contract certainty for exclusions that exacerbate protection gaps. In relation to policy issues around disaster risk financing, the FSCA says it and the Prudential Authority continue to support industry dialogue with the Treasury.

 ?? | SUPPLIED ?? LAST WEEK the FSCA published its Sustainabl­e Finance Consumer Risk Report and Roadmap 2024, outlining the risks and its proposals to counter them.
| SUPPLIED LAST WEEK the FSCA published its Sustainabl­e Finance Consumer Risk Report and Roadmap 2024, outlining the risks and its proposals to counter them.

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