Japan’s new head of financial regulation intends to increase his scrutiny of financial products that claim to be environmentally friendly, and step up vigilance of so-called “greenwashing”, when firms exaggerate their products’ green credentials.

“It’s necessary to establish a framework to verify the eligibility of products that relate to environmental, social and governance (ESG) issues…That’s one of our priorities for this current year,” Junichi Nakajima, who became commissioner of the Financial Services Agency last month, told Reuters.

“The new verification system should be equivalent to the international standard level,” he added.

When issuing ESG-related products, Japanese companies typically obtain certification from private rating institutions such as Rating and Investment Information (R&I) and Japan Credit Rating Agency.

However, some industry participants are sceptical about the ability of rating agencies to force change.

“Multi-national policy on ESG has so far proved itself to be ineffective in achieving its goals. There are a proliferating range of ESG ratings agencies that are trying to achieve some sort of dominance in this area at the moment,” Professor Kevin Haines, director of Sustainable Capital, a UK-based issuer of green and sustainable bonds, told FSA.

The ratings produced by these different agencies bear no relation to each other because they aren’t necessarily rating the same things; some will rate risk while some will rate the extent to which companies are environmentally friendly, according to Haines.

“We need regulation, but regulation is not going to achieve ESG objectives. The finance industry is full of very smart people and if they want to get around regulations they can do it easily,” he said.

“What we lack is a theory of change; there is no understanding of how the regulation is supposed to change the way in which organisations behave.”