Increasing their scrutiny of greenwashing in the financial sector, the European Supervisory Authorities (ESAs) – European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA) – have published a common understanding of greenwashing – the act of marketing products and services to be more sustainable than they are.
The ESAs highlighted the risks of misleading sustainability-related claims – spread either intentionally or unintentionally – to organisations and products within or outside the remit of the EU regulatory framework.
EU regulators said cherry-picking, omission, ambiguity, empty claims including exaggeration, and misleading use of ESG terminology such as naming and irrelevance, are seen as the most widespread misleading qualities.
The European Commission (EC) issued a “request for input related to greenwashing risks and the supervision of sustainable finance policies” to the three ESAs in May 2022 against a background of a mismatch between growing demand for ESG products and the limited pool of assets that are deemed sustainable.
The ESMA Progress Report on Greenwashing aims to help a better understanding of the subject and provide market participants and regulators with a shared reference point in dealing with this phenomenon.
The final report will be published in May 2024, providing a stocktake of supervisory powers, resources and actions to address greenwashing risks. It will also consider final recommendations, including possible changes to the EU regulatory framework.
The ESMA Progress Report reiterates stakeholder expectations to ensure investor protection and market integrity, and maintain a trusted environment for sustainable investments. The report specifically addresses issues relevant to issuers, including reporting.
The report also aims to shed light on the extent of greenwashing and to assess which areas of the sustainable investment value chain are more exposed to greenwashing risks. It does not, however, mention specific timeframes or preferred legal forms for the implementation of potential changes to the EU regulatory framework.
With the growth of ESG-related products and services, EU regulatory authorities are concerned that the complexity of sustainable finance, ESG literacy gaps, as well as a fragmented labelling landscape “limit the ability of retail investors to make informed investment decisions and participate in financing the transition according to their sustainability preferences”.
Misleading claims may relate to all key aspects of the sustainability profile of a product or entity – from governance aspects to sustainability strategy, targets and metrics or claims about impact.
In the EBA’s Progress Report on Greenwashing Monitoring and Supervision, which provides an overview of greenwashing in the banking sector and its impact on banks, investment firms and payment service providers, it found a clear rise in the number of potential cases of greenwashing across all sectors, including for EU banks, but also rising climate accountability.
The EIOPA’s own Advice to the European Commission on Greenwashing – Progress Report, which offers initial views on greenwashing from an insurance and pension perspective, revealed how greenwashing can occur at all stages of insurance and pensions. Greenwashing impacts insurance and pension providers themselves, who might suffer substantial reputational and financial damage when instances of greenwashing are disclosed to the public.
The ESMA report pinpointed a number of preliminary remediation actions, such as reinforcing the regulatory framework by clarifying certain key concepts and by further expanding on transition finance, sustainability impact or engagement. Companies are already expected to make substantiated claims and communicate sustainability information in a balanced manner.
Greater transparency on ESG data methodologies, clarifications on the use and calculation of estimates, external verification and auditing would also improve the reliability and comprehensiveness of sustainability data, ESMA’s report said.
The establishment of a reliable and well-designed labelling scheme for sustainable financial products and efforts to tackle ESG literacy gaps would also be beneficial.
Susanna Di Feliciantonio, ICAEW Head of European Policy, said: “The ESMA report highlights a number of high-risk greenwashing areas for issuers and points to the lack of expertise and skills when it comes to sustainability disclosures, especially among smaller issuers.
“This is likely to become even more critical and visible as issuers move to implement the requirements of the Corporate Sustainability Reporting Directive (CSRD). The CSRD will likely impact intentional and unintentional greenwashing – but it will be too early to tell by the time the ESAs are due to issue their final report next year.”
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