German fund company sued for “greenwashing”
One of the largest German fund companies promotes a green equity fund with specific figures on savings and monetary benefits for the environment. A German-based consumer protection association considers this to be misleading – and is taking the matter to court.
The legal challenge
On the website of the fund company, potential investors can enter an investment amount into a so-called “impact calculator” determining the environmental impact of any investment in the respective fund. For this purpose, it provides specific figures on, for example, how much CO₂ can be saved or how much renewable energy can be generated by an investment. For an investment of EUR 10,000, the calculator indicates, inter alia, that more than 42,000 litres of water can be saved, 830 kilowatt hours of renewable energy can be generated, and EUR 1,145 can be contributed to investments in the health sector. The fund company describes these figures on its website as "possible positive effects" of a sustainable investment.
In an explanatory footnote, however, the fund company states that the figures and sustainability criteria presented do not fully reflect the entire sustainability criteria of the companies included in the fund. In addition, individual sustainability criteria of the respective companies may change over time or be weighted differently. The fund company therefore emphasises that all figures and calculations are subject to estimation.
In its action brought before the Regional Court of Frankfurt am Main, the consumer protection association (the Verbraucherzentrale Baden-Württemberg) neither claims that the fund company did not inform potential investors about its methodology at all, nor that the underlying data were false. Rather, it considers the disclosure of specific figures on potential savings and monetary benefits for the environment to be “misleading by omission”. According to the association, this is particularly due to the fact that the fund company only provides information on its calculation method and the estimated nature of the figures in the small print. In essence, it argues that the fund company’s reference to “possible positive effects” does not sufficiently indicate that the promoted ecological effects are merely estimates for which there is no evidence.
The fund company rejects these allegations as unfounded. It contends that the estimates and the underlying figures are based on both a sound methodology as well as a solid foundation of sustainability criteria. Moreover, the data used in the calculations were provided by service providers with decades of experience in ESG and climate data.
The dangers of greenwash
The lawsuit against one of Germany’s largest fund companies is the latest in a growing number of ‘greenwashing’ allegations in the investment and business world at a time of heightened shareholder activism.
Nordea, for instance, faced similar challenges in June 2019 when it announced that some of the company’s funds would result in 27 times more carbon savings than if its potential investors cut back on meat and water consumption, reduced international flights and used public transportation. In addition, a 2020 study by the international think tank “2 Degrees Investing Initiative” found that 99% of the statements on environmental impact made by a selection of fund companies did not comply with regulatory guidelines.
The proceedings now initiated against the German fund company once again underline the determination of shareholders, investors, consumer protection associations, NGOs and other activists to take action regarding (allegedly) inaccurate information and to urge financial institutions to (adequately) disclose business and risk relevant data.
Given that there are some concerns about the reliability and comparability of ESG data, as well as the methodologies used to assess that data, material risks may arise for financial institutions and companies alike. This, however, will presumably change in the near future, as the EU intends to set more guidelines and regulate the market for sustainable investments more strictly, including potentially regulating ESG data and ratings providers (see here and here).
Meanwhile, it remains to be seen how the Regional Court of Frankfurt am Main will address the allegations against the German fund company.