08/02/22

IRELAND: Regulator warns of 'greenwashing' of financial products.

As published on rte.ie, Tuesday 8 February, 2022.

The Central Bank has warned investors that the growth of the sustainable finance market has increased the risk that some financial products are not as sustainable as claimed.

The regulator claims such "greenwashing" can see investor demand addressed by products that are marketed as sustainable but in reality are not.

"If, through inadequate or incorrect disclosures investors are misled into buying products that do not meet their sustainable expectations, it will damage the sustainable finance industry that is crucial to the transition toward greener economic activities," the bank says in its latest Securities Markets Risk Outlook Report.

"As sustainable finance becomes part of the mainstream investment process, firms need to be cognisant of their responsibilities in this space to ensure investor interests and market integrity are protected."

The annual Securities Markets Risk Outlook Report identifies key risks to securities markets in the coming year.

It also outlines the Central Bank's supervisory priorities for markets in the current year.

In the report, the bank also says it is highly unlikely at present that it will give approval for funds that are generally aimed at retail investors to begin investing in crypto assets.

It says it has seen an increases in queries in relation to whether Undertakings for Collective Investment in Transferable Securities or UCITS or Alternative Investment Funds (AIFs) may be invested into cryptocurrencies.

"At the moment, while such assets may be suitable for wholesale or professional investors, the Central Bank is highly unlikely to approve a UCITS or a Retail Investor AIF proposing any exposure (either direct or indirect) to crypto-assets, taking into account the specific risks attached to crypto-assets and the possibility that appropriate risk assessment could be difficult for a retail investor without a high degree of expertise," it said.

Many cryptocurrencies have been the subject of extreme volatility and wild swings in value in recent years, prompting concern among regulators about their appropriateness as an investment class.

On the issue of retail investment in the stock market, the bank says there has been a rise in recent times, attributed by some to the impact of Covid-19 restrictions and the low interest rate environment.

It also says the trading apps that offer low or zero commission rates have changed the market dynamics and the profile of the typical investor.

"Retail investing in and of itself is not a concern, but there is a risk of bad actors potentially taking advantage of social media platforms to manipulate the market," it said.

"Allied to this, there are potential regulatory issues arising from an increase in recommendations/views disseminated online by unregulated entities."

"While such commentary may be of high quality and conflicts declared, investor protection and market integrity may be compromised in some circumstances."

The regulator's report also states that it is essential that all firms operating in the stock market have appropriate plans in place to deal with the threat of cyberattacks.

"Without controls and procedures in place to identify and minimise sources of information security risk, firms run the risk of being subject to a cyberattack," it said.

"Cyber security has long been an area of focus for the Central Bank, and recent domestic cyberattacks have strengthened our resolve to ensure regulated financial service providers are adequately addressing this issue."

Regarding due diligence, the bank says it has seen evidence of fund managers and boards not undertaking sufficient scrutiny before deciding to appoint third party service providers.

It also says firms have extensive obligations to detect, prevent and report misconduct, and must review their compliance with the Market Abuse Regulations.