South Africa’s big crackdown on greenwashing

In contrast to the chill on environmental, social and governance (ESG) imperatives in US investment circles, South Africa’s Financial Sector Conduct Authority (FSCA) is preparing to close the loopholes on greenwashing. 

In a report released last week, the country’s regulator says it will implement much tougher guardrails around “sustainability” claims when in financial products, particularly when it comes to advertising and marketing. 

This development comes as many banks and investment firms in the US increasingly shy away from products that punt their ESG credentials, in deference to Donald Trump’s US administration, which has derided this as “woke capitalism”. 

Yet in other parts of the world, ESG remains a priority. 

A new report from UK-based consultancy OxProx shows that European and UK asset managers still lean heavily towards sustainability. Its study of 4.57-million AGM voting records in the US, Europe, Canada, Australia and New Zealand shows that Europeans voted in favour of ESG proposals between 27.8% and 68% more than US managers – highlighting how the US has become an outlier. 

South Africans appear to identify strongly with the European disposition. A survey by the FSCA last March found that 84.7% of consumers expect financial institutions to “consider environmental and social impacts in investment decisions”. 

Global investors evidently feel similarly, which is why the global market for ESG products, despite the White House sentiment, has expanded rapidly. Morningstar research shows that by the end of last year, there was $3.9-trillion in “sustainable funds” – a near sixfold increase since 2018.

But as the market for ESG products grows, so too does the risk of greenwashing – institutions making fabulously untested claims about their green credentials to sell products. 

The FSCA says in its report that it will be putting in place a new disclosure regime to mitigate the potential to “mislead consumers, distort market signals and divert capital away from genuinely sustainable or impactful activities”.

This will take the form of “guidance” over how to advertise and market financial products that make claims around sustainability, and will apply to banks, insurers, collective investment schemes and financial services providers. 

“In the retail financial customer context, the guidance covers any sustainability-related claims or disclosures these institutions make about financial products or services,” the report says. 

The FSCA is at pains to say this is only meant to “complement existing disclosure regimes” and use “legal provisions more effectively” rather than replacing existing rules. The standard is that the consumer information must be “clear, factually correct, not misleading, and presented in plain language”, it says. 

Until now, consumers who have been lied to over how “green” a product is would have relied on wider catch-all rules, such as the Policyholder Protection Rules for insurers, or the Collective Investment Schemes Control Act. 

But these new rules will give them a more direct tool to hold product providers accountable.

Climate rules for JSE firms

But this isn’t the only change afoot. The regulator is also going to require large JSE-listed companies to disclose their sustainability measures, beginning with their climate metrics. 

The idea is to standardise the disclosure around climate, allowing investors – including pension funds – to effectively compare what is happening at companies like AECI and Omnia when it comes to their environmental practices.

“High-quality sustainability and climate reporting … improves market integrity, comparability, price discovery, and capital allocation, and supports reliable sustainability-related claims for investors,” the report says. “Inconsistent or incomplete reporting can lead to misalignment and increase the risk of misleading sustainability-related claims.”

This will be a major change to South Africa’s capital market: until now, the absence of uniform disclosure meant that a company like Sasol needed only to disclose the climate metrics that best suited its narrative. 

Last year, for instance, Sasol provided a detail-light plan on how it aimed to reduce its emissions by 2030, while claiming that an increase in emissions would be “offset” through carbon credits and renewable energy projects. 

Critics said Sasol’s climate plan lacked “transparency and scientific integrity” – but a new uniform standard for disclosure would reduce the scope for this. 

Nicole Martens, the new executive director for non-profit activism organisation Just Share, says the new rules around marketing of ESG claims are a big step forward for South Africa’s market. 

“This is aimed squarely at greenwashing,” she says. “Financial institutions that present themselves as responsible investors – or market products as “sustainable” – will increasingly need to demonstrate that these claims are credible and supported by evidence.”

Martens says the planned new disclosure rules around JSE-listed companies “should make it easier for investors to assess climate risks and opportunities – and harder to make vague ESG claims without substance”.

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