European Supervisory Authorities Set Common Standard on Greenwashing and Warn of Risks

The European Supervisory Authorities (ESAs), consisting of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA), have taken a significant step towards combatting greenwashing in the financial sector. Their recent Progress Reports on Greenwashing have introduced a shared high-level understanding of the phenomenon, applicable to participants in various financial sectors including banking, insurance, pensions, and financial markets.

The ESAs' Common High-Level Understanding of Greenwashing

Greenwashing, according to the ESAs, refers to practices where statements, actions, declarations, or communications regarding sustainability do not accurately represent the true sustainability profile of an entity, financial product, or financial services. Such practices can mislead consumers, investors, or other stakeholders, and may occur both intentionally and unintentionally. The ESAs emphasize that misleading sustainability-related claims can extend beyond the boundaries of the EU regulatory framework, encompassing entities and products within and outside its scope.

In response to stakeholder expectations and the need for consumer and investor protection, market integrity, and a reliable sustainable finance environment, the National Competent Authorities (NCAs) and the ESAs are working together in a coordinated manner to tackle greenwashing. Recognizing the interconnected nature of the financial system, these supervisory authorities aim to address greenwashing in a comprehensive manner.

The ESMA Progress Report plays a pivotal role in providing clarity and understanding of greenwashing, serving as a reference point for market participants and regulators alike.

The report assesses the components of the sustainable investment value chain (SIVC) that are most vulnerable to the risks of greenwashing. By identifying these areas, the ESMA aims to assist market participants in preventing and mitigating the issue. Moreover, the findings guide ESMA and NCAs in prioritizing supervisory actions and regulatory interventions.

Comprehensive Understanding of Misleading Claims

The report highlights that misleading claims associated with greenwashing can touch upon all critical facets of the sustainability profile of an entity or product. These encompass aspects ranging from governance and sustainability strategy to targets, metrics, and impact claims. The report also provides sector-specific evaluations for key sectors within ESMA's jurisdiction, including issuers, investment managers, benchmark administrators, and investment service providers.

Greenwashing emerges from a complex interplay of factors. Market participants across the SIVC encounter challenges in implementing robust governance processes and tools to support accurate sustainability disclosures and transition initiatives. The availability and accessibility of high-quality sustainability data pose further difficulties. Meanwhile, a dynamic regulatory landscape has presented implementation challenges for both market participants and supervisory authorities, underscoring the need for enhanced sustainability expertise.

To mitigate the risks of greenwashing, the ESAs stress the importance of substantiated claims and balanced communication regarding sustainability. They highlight the necessity of improving the comprehensibility of sustainability disclosures for retail investors, advocating for the establishment of a reliable and well-designed labelling scheme for financial products. Additionally, the ESAs call for the maturation of the regulatory framework, clarification of key concepts, and better integration of sustainability impact and engagement.

The ESAs' Progress Reports lay the foundation for addressing greenwashing risks across the SIVC and within key sectors under ESMA's oversight, charting a path toward a more transparent and accountable financial landscape.