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Greenwashing Investigations: Unmasking Deceptive ESG Practices

Greenwashing Investigations: Unmasking Deceptive ESG Practices

In brief
  • Greenwashing is a deceptive practice that can lead to serious financial implications in the industry.
  • Regulators are increasingly taking financial services providers to task over the issue of greenwashing.
  • Organizations can adopt measures in various areas to avoid greenwashing in their business.

In a world increasingly driven by environmental consciousness and sustainable choices, it is crucial for consumers and investors to make well-informed decisions. Yet, lurking beneath the surface of eco-friendly marketing is in some cases a deceptive practice known as greenwashing.

Greenwashing in financial institutions can relate to several different areas, including financial products, loans, investments, communications and the overall environmental impact of the institution. For financial products, attempts can be made to market these products as sustainable and ecological – without the substance to back up claims. 

Loans may be granted to businesses for sustainable developments when the funds are not in fact employed for such purposes. Furthermore, financial institutions are at risk of performing investments in businesses, branding themselves as sustainable and ecological even though the businesses fail to meet such criteria.

With marketing and communications, a financial institution can try to brand itself using key words such as “sustainable” and “ESG”, even if these labels are not appropriate.
Recently, greenwashing of financial products – a form of investor fraud – has been on the radar of investigators. Due to the high demand of “sustainable” or “green” financial products, investment advisors are making profit selling their financial products as such.

We see three main categories of such cases as illustrated by the examples below:


Last year, the German law enforcement agency conducted a raid on a well-known listed asset manager based on fraudulent claims from the entity that their investments were “ESG-integrated”. The institution was subsequently charged with fraud based on their misleading communications. The German prosecutors stated that there were sufficient clues that the entity’s funds were only minimally considering ESG factors. The investigation has now spread to multiple jurisdictions and involves Germany’s Financial Supervisory Authority BaFin as well as the US DoJ, SEC and FBI.


The same year, another well-known asset management entity was accused by the SEC of failing to follow its policies and procedures involving ESG investments. The SEC found that the asset management entity was entirely missing written policies and procedures for ESG research in one product, and once policies and procedures were established, it failed to follow them consistently. The entity was fined several million US dollars in penalty fees. Interestingly, this accusation and sanction is not based on a breach of the law, but on the entity’s not having and then breaking its own internal policies.


Also in 2022, an investment advisor company was charged by the SEC for misstatements and omissions concerning ESG considerations. The SEC found that from 2018 to 2021, the investment adviser represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though that was not always the case. The entity was fined over a million US dollars in penalty fees.

Growing regulatory interest in the topic ESG is directly linked to the increased interest in financial products incorporating ESG and, consequently, also the rise in white-collar crime in the area. A change in the regulatory environment can also be observed in Switzerland. As of 2023, large Swiss businesses are required to include ESG interests in their annual reporting, with false claims and insufficient transparency potentially leading to fines. As seen in the cases mentioned above, proclamations of having “sustainable” and “ESG-friendly” investments do not necessarily translate into the truth. However, the current regulatory environment in Switzerland is not without challenges for businesses. A lack of official definitions for key terms such as “sustainable” and “green”, as well as the term “greenwashing”, contribute to an uneasy operating environment.


With the aim to promote transparency, protect consumers and investors, safeguard the environment, foster fair competition and maintain public trust in the integrity of sustainability efforts, the European Union has started to address challenges by providing certain definitions – including for “greenwashing”:

“The practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact basic environmental standards have not been met.”

The definition is derived from the EU Taxonomy regulation, which establishes a framework to facilitate sustainable investments. On 13 June 2023, the European Commission put forward a new package of measures to strengthen the foundations of the EU sustainable finance framework. In particular, the Commission approved in principle a new set of EU Taxonomy criteria for economic activities making a substantial contribution to one or more of the non-climate environmental objectives, namely:

  • Sustainable use and protection of water and marine resources
  • Transition to a circular economy
  • Pollution prevention and control
  • Protection and restoration of biodiversity and ecosystems

The Swiss Financial Market Authority (FINMA) defines greenwashing as the fact of misleading clients and investors about characteristics of financial products and services with regards to being “green”, “sustainable” and “ESG” (FINMA Guidance 05/2021 on preventing and combating greenwashing). In line with its definition, FINMA questions financial institutions about their “green” financial products. The main aspect under investigation is whether the funds have “a real impact”. This is in particular hard to prove for transition to net zero funds. On the contrary, it is accepted that shares of a wind energy company are labelled “green”. However, in Switzerland, there are not yet any hard laws specifically tailored to avoid greenwashing. A taskforce has been set up consisting of the working group led by the Federal Department of Finance (FDF) to examine the best way to implement the Federal Council’s position on the prevention of greenwashing. In addition to representatives from the FDF, the working group will be supported by individuals from the Federal Department of the Environment, Transport, Energy and Communications (DETEC), the Federal Department of Economic Affairs, Education and Research (EAER), the Swiss Financial Market Supervisory Authority (FINMA), industry and non-governmental organizations to come up with suggestions on how to prevent greenwashing by the end of September 2023.


Financial institutions can take several measures to avoid committing greenwashing. Alongside transparent communication and compliance regulations, it is important to incorporate a strong corporate governance structure that includes robust oversight, risk management processes and accountability mechanisms. This means systematically documenting decisions about why a product is marked as sustainable and mastering this data.

As per the International Standards for Good Governance (ISO 3700:2021), it is key for businesses to have processes in place which can investigate and evaluate potential breaches of ESG. The purpose of such investigations is to address the shortcomings and strengthen the respective compliance management systems. Additional steps to take are around due diligence, ongoing monitoring and reporting.

In response to the pressing issue of greenwashing, various organizations have taken proactive measures to ensure transparency and accountability. Several key action areas have emerged as part of their efforts which may provide valuable inspiration for other organizations keen to avoid greenwashing:

Organizations conduct reviews of their ESG compliance strategies through thorough status-quo analysis, opportunity mapping, and the implementation of digital solutions. They actively address emerging typologies and risks, such as greenwashing, third-party ESG risk, reputational risks, activist ESG shareholders, and whistleblowers. Collaboration with experts from fields like forensic accounting and technology as well as legal enforcement agencies enhances their capabilities.

Due diligence for suppliers and contractual partners has also gained significant importance, especially with the recent approval of the EU Directive Proposal for Corporate Sustainability Due Diligence. Organizations consider the extraterritorial impact of this directive in their assessments.

Organizations can leverage forensic technology to validate data, monitor data streams, manage whistleblower cases, and conduct digital investigations. They also digitize compliance processes, forensic diligence and complex litigation. Some organizations are already actively evaluating and select digital ESG solution providers based on market mapping, ensuring appropriate integration. Others have developed their own proprietary digital ESG solutions and research platforms.

Various customized data and technology solutions are employed, including data mapping and warehousing, forensic data analytics, visualization, and comprehensive training workshops. The integration of these solutions further enhances their capabilities. Tools such as EY Virtual and other digital platforms are utilized to identify and escalate risks, facilitate investigations, and respond to litigation needs.

Organizations understand the critical importance of compliance and integrity assessments for key suppliers and business partners to avoid greenwashing surprises. They recognize that the actions of third parties can have far-reaching impacts on their reputation. Establishing a strong governance foundation within the realm of ESG, organizations conduct assessments of corporate governance, corporate behavior, integrity, and ethics. These assessments enable them to identify red flags and manage potential risks effectively. Collaborating with specialized teams can help organizations address emerging risks, including compliance assessments, third-party risk management and responses to regulatory matters.


Regulatory scrutiny of greenwashing is set to intensify as consumer interest in sustainable products grows. Organizations should ensure that they are familiar with the legal requirements and take appropriate measures such as investigating their current situation to comply with them and avoid greenwashing. It can be helpful to partner with an external expert organization to access relevant tools and know-how.


We kindly thank Désirée Schreyer for her valuable contribution to this article.

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The Institute of Internal Auditors-India (IIA-India) is affiliated to The Institute of Internal Auditors.

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