The European Supervisory Authorities (ESAs) published progress reports on greenwashing in the financial sector, putting forward a common high-level understanding of greenwashing applicable to market participants across their respective remits – banking, insurance and pensions and financial markets.
The ESAs include the European Banking Authority (report here), European Insurance and Occupational Pensions Authority (report here), and European Securities and Markets Authority (report here).
The ESAs understand greenwashing as a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants.
The ESAs also highlight that sustainability-related misleading claims can occur and spread either intentionally or unintentionally and in relation to entities and products that are either within or outside the remit of the EU regulatory framework.
The National Competent Authorities (NCAs) and the ESAs are, therefore, working to meet expectations from stakeholders to ensure consumer and investor protection, support market integrity and maintain a trusted environment for sustainable finance. Given the integrated nature of the financial system, the ESAs work in a coordinated manner to address greenwashing.
ESMA progress report
ESMA assesses which areas of the sustainable investment value chain (SIVC) are more exposed to the risk of greenwashing. This assessment is meant to help market participants in preventing and mitigating greenwashing, and to support ESMA and NCAs in prioritizing supervisory actions and regulatory intervention.
The findings show that misleading claims may relate to all key aspects of the sustainability profile of a product or an entity – from governance aspects to sustainability strategy, targets and metrics or claims about impact. The report also provides sector-specific assessments for key sectors under ESMA’s remit such as issuers, investment managers, benchmark administrators and investment service providers.
Greenwashing is the result of multiple inter-related drivers. Market participants across the SIVC face challenges in implementing the necessary governance processes and tools that support high-quality sustainability disclosures and transition efforts. In this context, market participants also have difficulties in producing and accessing relevant, high-quality sustainability data. Furthermore, a fast-moving regulatory framework has created implementation challenges for both market participants and for NCAs and highlighted the need to build sustainability expertise.
One area covered in ESMA’s report are the limitations in using of ESG controversies to assess greenwashing-related financial risks. Entities may be involved in greenwashing controversies in very different ways, which will have implications on the potential financial risks they face. A firm’s involvement in an incident sometimes stems from the way a whole sector operates, or from individual country policies (e.g., differences in environmental protection rules).
In turn, these incidents can reverberate on the reputation of individual firms operating in the sector or country. Such nuances are not immediately visible in financial data on controversies, implying that further filtering is necessary to understand the potential reputational and financial implications for these firms.
The indirect involvement issue can be particularly challenging for the financial sector, where financial institutions often provide financing to firms involved in controversies beyond their immediate control. Similarly, controversies may relate to a firm’s own operations or to its value chain. Large group structures and the existence of multiple subsidiaries can further limit a firm’s ability to have a comprehensive overview of its operations, yet firms are increasingly expected to act responsibly throughout the value chain.
Preliminary remediation actions
To mitigate greenwashing risks, market participants across the SIVC have to live up to their responsibility to make substantiated claims and communicate on sustainability in a balanced manner. Comprehensibility of sustainability disclosures to retail investors needs to be improved, including by establishing a reliable and well-designed labelling scheme for financial products. Finally, the regulatory framework needs to gain in maturity, key concepts need to be clarified and sustainability impact or engagement better integrated.