As the global financial sector increasingly embraces environmental, social, and governance (ESG) principles, green finance has emerged as a central component of many lending strategies. However, with ESG integration comes a growing risk: legal liability arising from greenwashing, and misrepresentation.
This note explores the legal landscape surrounding ESG misrepresentation in green finance, highlighting potential liabilities, regulatory scrutiny, and best practices to mitigate risk.
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What is Green Finance?
Green finance refers to financial activities and investments that support better environmental outcomes. Projects may relate to renewable energy, sustainable agriculture, or eco-infrastructure. Lenders have developed products like green bonds and sustainability-linked loans to meet ESG goals while serving their clients’ capital needs.
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Legal Risks of ESG Misrepresentation in Lending
As green finance expands, so does the legal scrutiny around how lenders structure, label, and promote ESG-linked products. A key area of risk includes “Greenwashing” where a lender misrepresents or exaggerates the environmental benefits of its financial products or services, which are not met.
Legal consequences may include:
- Fraud or misrepresentation claims by investors such as claims arising out of Sections 90 and 90A of the Financial Services and Markets Act 2000, which allows investors with a right of claim for losses caused by reliance on misstatements or omissions on project prospectuses or financial reports.
- Regulatory fines for greenwashing under the Digital Markets, Competition and Consumers Act 2024 and breaches under the Financial Conduct Authority’s (FCA) anti-greenwashing rule.
- Reputational damage which can trigger further commercial losses or litigation (see UK case: ClientEarth v Shell plc [2023] EWHC 189).
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Best Practices in the Legal Landscape
Lenders should:
- Strengthen ESG due diligence during credit approval, including sustainability assessments of funded projects.
- Use realistic and measurable key performance indicators aligned with UK law and FCA guidance.
- Require independent ESG verification, regular reporting, and audits.
- Establish internal controls and escalation protocols for ESG breaches.
- Engage ESG legal/compliance experts for project monitoring, regulatory advice, and contract drafting with enforceable ESG clauses.
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Conclusion
Green finance has become a mainstream part of global banking, bringing both opportunity and legal responsibility. To avoid the growing risk of ESG misrepresentation and greenwashing, lenders must ensure their ESG-linked lending is fair, clear from the onset, and not misleading.
If you have any questions on the above, or are a lender interested in providing green finance, please do get in touch with a member of our Banking and Finance team.
This update is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this update may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.
