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Slowly, European regulators turn up the heat on greenwashing

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November 4, 2021

By Tommy Wilkes and Simon Jessop

LONDON (Reuters) – European financial regulators say they are uncovering more cases of greenwashing by asset managers cashing in on booming demand for sustainable finance, and some are starting to turn the screw on funds that cannot back up what they claim.

Trillions of dollars have poured into sustainable investment strategies in recent years and regulators have taken little action to ensure funds are marketed accurately, partly because of the lack of agreement on what ‘sustainable’, ‘green’ and ‘greenwashing’ mean.

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That makes it tough for watchdogs to prove deliberate exaggeration of environmental, social and governance (ESG) credentials, but this week IOSCO, which groups watchdogs, published recommendations to help members find firms who may be hoodwinking investors.

Regulatory risks have shot up the agenda since U.S. and German investigators said they were probing claims by the former head of sustainability at Deutsche Bank’s asset management arm, DWS, that it misled investors with its sustainable investing criteria. DWS rejects the allegations.

Lawyers in London said since those investigations were made public, asset managers were rushing to ensure they did not fall foul of regulators.

“We’ve definitely had more enquiries from our asset management client base, particularly around the marketing message – what is green? Are we getting this right?,” said Richard Small, partner at Addleshaw Goddard.

“It’s all too easy for this to turn into a mis-selling issue.”

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Regulators in France, Britain, Sweden, the Netherlands and Switzerland told Reuters they had found a number of instances where ESG claims were not backed up. The asset managers were asked to provide more information to support those claims, or forced to drop sustainability labels.

That shows how watchdogs are moving beyond the European Union’s landmark Sustainable Finance Disclosure Regulation (SFDR), which in March imposed mandatory ESG disclosure obligations on managers, to take more targeted action.

French watchdog AMF has forced managers to drop ESG labels after finding “completely unacceptable” cases of greenwashing, including funds that justified ESG names by excluding stocks already proscribed under French law, said Philippe Sourlas, head of AMF’s asset management directorate.

“We have a range of tools to tackle greenwashing. It can go from soft bilateral communication with the asset manager, to public guidance issuance, to a sanctions process,” he said.

Nick Miller, asset management department head at Britain’s Financial Conduct Authority, said weak fund disclosures were common.

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“Often the quality of the information is not sufficient for us to even begin considering the (fund) application,” he said, adding it also raised questions about whether managers met value for money regulations given ESG funds often charge higher fees.

Switzerland’s regulator FINMA said it is dedicating more resources to tackling the problem and has “immediately eliminated” cases of greenwashing it has found, by forcing managers to drop ESG claims, or amend relevant disclosures.

HOT TREND

ESG is one of the hottest investment trends, with assets in sustainable funds nearly doubling in six months to reach a record $3.9 trillion at end-September, according to Morningstar.

That explosive growth has left regulators playing catch up across the globe.

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In the U.S., the Securities and Exchange Commission has been asking managers to explain the standards they use for classifying funds as ESG-focused, sources said in September. Earlier this year the SEC said it had found “potentially misleading” claims related to ESG investing.

Reuters spoke with regulators in Britain, France, Switzerland, Sweden, Norway, the Netherlands, Germany and Luxembourg, five of which had identified funds marketed in their jurisdictions which make claims unsupported by the information they disclosed. The other three had not carried out detailed investigations or declined to comment.

Sweden’s Finansinspektionen found around 5% of 400 funds it examined made claims that did not stack up, head of sustainable finance, Johanna Fager Wettergren, said.

“It indicates a broader problem and we can intervene against funds that don’t conduct themselves properly,” she said.

The FCA’s Nick Miller said poor ESG disclosures were so widespread in the UK that it had written to fund manager boards in July setting out their need to disclose sustainability approaches in prospectuses and show how strategies can meet ESG objectives — like why they choose certain stocks over others.

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The United Nations-backed Principles for Responsible Investment (PRI), an investor network, said it welcomed regulatory efforts to tackle the problem of greenwashing.

But CEO Fiona Reynolds said supervision should be proportionate and “investors must not be discouraged from creating sustainability-focused products due to burdensome requirements.”

MIS-SELLING RISK

The approach of regulators to date has centred on publishing guidance and engaging in dialogue with managers.

Proving deliberate mis-selling is hard when definitions of ‘sustainable’ or ‘green’ are still being debated. Some doubt the success of prosecuting cases under the current regulatory framework.

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In the UK, the FCA’s Miller noted that poor fund disclosure doesn’t mean anyone had necessarily broken any rules.

The Dutch, Norwegian, Swedish and Swiss regulators said they hadn’t launched any greenwashing-related enforcement action yet.

Switzerland’s FINMA said statutory definitions of terms such as ‘sustainable’ and ‘environmentally friendly’ were needed first, while French regulator AMF is looking for improvements in ESG data and better definitions to help combat greenwashing.

The Dutch watchdog is waiting for the July 2022 introduction of SFDR’s second phase, a more detailed application of the new disclosure rules, before it takes any action against managers individually, said AFM’s senior supervisor Zoë du Chattel.

Tamara Cizeika, counsel at Allen & Overy, said that although regulators do understand new rules have a teething period, they are signalling that they are ready to take a tougher line.

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Britain’s guiding principles, for example, are about the application of existing laws to a slightly new context, making it harder “for asset managers to say ‘can I have time to get it right?’,” she said.

“This is all about investor protection and market integrity. We’d argue that boards should sit up and take notice because it is a significant and growing risk.”

(Editing by Rachel Armstrong & Elaine Hardcastle)

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Exclusive-KNDS readies 650 million euro binding bid for Leonardo units – sources

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December 2, 2021

By Angelo Amante, Francesca Landini and Elisa Anzolin

ROME (Reuters) – KMW+Nexter Defence Systems (KNDS) is close to making a 650 million euro ($736 million) binding bid for Leonardo’s OTO Melara and Wass units, three sources said on Thursday, in a move that could strengthen its position in the land defence sector.

The Franco-German consortium is conducting due diligence on the two units that Italian defence group Leonardo has put on the block and could submit its offer by the end of the year or early 2022, the sources familiar with the matter said.

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KNDS is pitted against Italian shipbuilder Fincantieri, which expressed an interest in the units but has not started formal due diligence and has put forward a less generous proposal so far, the sources said.

The Italian government, which controls both Leonardo and Fincantieri, is determined to have the final say on the deal.

As Europe pushes for closer cooperation on defence, Rome wants to keep open the door for cooperation between domestic and foreign groups, political sources have said, but also wants to protect jobs and growth at home.

As part of its proposal, KNDS has offered to include Italy in the Main Ground Combat System (MGCS) tank project, an option that would give Leonardo the possibility of offering its sensors and electronics for the new tank.

OTO Melara, which makes naval and terrestrial cannons, would also fit into KNDS’s portfolio and strengthen its hand in a 2.2 billion euro contract that the Italian army is due to launch in the near future.

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OTO Melara is currently a tank supplier to the Italian army together with Iveco Defence Vehicles, while Wass produces torpedoes.

Fincantieri, which started informal talks with Leonardo over OTO Melara and Wass before KNDS’ approach, could decide to join forces with other groups, the sources said.

($1 = 0.8836 euros)

(Additional reporting by Christina Amann in Berlin Writing by Francesca Landini; Editing by Mark Potter)

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Fed’s Quarles says regulatory overkill could stifle stablecoin innovation

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December 2, 2021

By Pete Schroeder

WASHINGTON (Reuters) -Randal Quarles, the former regulatory chief of the Federal Reserve, said on Thursday that U.S. regulators may “unnecessarily” hamper innovation around so-called stablecoins if they pursue recent recommendations put forward by a Biden administration working group.

Quarles, who will leave the Fed’s Board of Governors at the end of the month, said regulators must show “reasoned constraint” on monitoring stablecoins, which are digital currencies whose value are pegged to traditional assets like the dollar. He added that banks should be allowed to engage with them once certain concerns around transparency, stability and consumer protection are met.

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“It is clear that there is a strong demand for these assets among bank customers, and well-regulated banks should be allowed to engage in activities regarding these assets,” he said in a virtual appearance at an American Enterprise Institute event in Washington.

Quarles specifically cited a recommendation that any stablecoin issuers or “wallet providers” have limited access to other commercial entities, calling it needlessly stricter than rules for nondigital assets.

The President’s Working Group on Financial Markets published a report in November calling on Congress to pass a new law to apply bank-like scrutiny to stablecoin providers.

In his final speech at the Fed, Quarles laid out a series of recommendations for the central bank following his exit. President Joe Biden has yet to nominate his replacement.

For example, Quarles also said the Fed should consider easing its “globally systemic” capital surcharge for the nation’s largest banks, particularly as regulators move to finalize added global capital restrictions known as “Basel III.”

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He said the Fed’s plan to finalize those new rules would come after his exit from the U.S. central bank, and said there will be “little justification” for keeping the G-SIB surcharge at its current high level once it’s done.

He also argued the Fed should consider averaging the results of its annual stress test of bank finances over several years to result in a more consistent capital level, and that the central bank needs to address “perverse implications” of current leverage requirements that could discourage banks from holding safe assets in times of stress.

(Reporting by Pete SchroederEditing by Paul Simao)

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S&P 500, Dow climb on boost from financials, Boeing

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December 2, 2021

By Devik Jain and Anisha Sircar

(Reuters) – The Dow and the S&P 500 rebounded on Thursday, boosted by financials shares and Boeing as rising cases of the new Omicron variant globally continued to drive volatility across markets.

Boeing Co jumped 3.5% after China’s aviation authority issued an airworthiness directive on the 737 MAX jets that will help pave the way for the model’s return to service in China.

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Kroger Co surged 9.9% to top the S&P 500 after the retailer raised full-year sales and profit forecasts, boosted by sustained demand for groceries.

Travel and leisure stocks bounced back, with S&P 1500 Airlines and the S&P 1500 Hotels, Restaurant and Leisure indexes rising 4.5% and 2.8%, respectively.

All of the 11 major S&P sectors advanced in early trading, with eight of them surging more than 1% each. Financials led the pack, up 2.3%.

Wall Street’s main indexes closed below key technical levels on Wednesday, with the Dow breaching its 200-day moving average for the first time since July 2020 on growing angst about the latest coronavirus variant and the Federal Reserve’s hawkish comments.

“It is a bit of a ‘buy the dip’ environment … uncertainty will persist over the next week or so as scientists do more studies over the new variant,” said Sam Stovall, chief investment strategist at CFRA Research in New York.

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“I still think investors want to focus on equities, they just need to be given a reason to do so.”

Wall Street whipsawed this week as investors scrambled for bargains after every drawdown. Still, the three indexes are tracking sharp weekly losses, with the Dow on pace for its fourth straight fall.

The United States and Germany joined countries around the globe planning stricter COVID-19 restrictions as the Omicron variant rattled markets, fearful it could choke a tentative economic recovery from the pandemic.

The CBOE volatility index, also known as Wall Street’s fear gauge, was last trading at 28.6 points, a day after hitting its highest level since February.

At 10:27 a.m. ET, the Dow Jones Industrial Average was up 462.69 points, or 1.36%, at 34,484.73 and the S&P 500 was up 43.36 points, or 0.96%, at 4,556.40.

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The Nasdaq Composite was up 31.90 points, or 0.21%, at 15,285.96, supported by shares of Amazon.com, Tesla Inc, Microsoft Corp and Nvidia Corp.

Apple Inc fell 2.7% after Bloomberg reported about slowing demand for Apple’s iPhone 13.

Meanwhile, lawmakers reached an agreement to fund the U.S. government until Feb. 18 as they scramble to avoid a partial government shutdown this weekend.

Stellar earnings reports and strong economic growth have powered U.S. stocks to a series of record highs in November, with the S&P 500 climbing 20.1% so far this year.

A Reuters poll of equity analysts said a correction was likely in the next six months, with the benchmark expected to gain 7.5% between now and end-2022 to finish at 4,910.

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Advancing issues outnumbered decliners by a 2.63-to-1 ratio on the NYSE and a 1.43-to-1 ratio on the Nasdaq.

The S&P index recorded three new 52-week highs and nine new lows, while the Nasdaq recorded seven new highs and 393 new lows.

(Reporting by Devik Jain and Anisha Sircar in Bengaluru; Editing by Maju Samuel)

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