ESMA takes aim at “greenwashing” with new guidelines – fintech commentary

The European Securities and Markets Authority (ESMA) released principles-based guidance for funds’ names with environmental, social and governance (ESG) and sustainability -related terms.

In recent years, investor demand for investment funds that incorporate ESG factors has been growing sharply and it is expected to continue growing in the future. Competitive market pressures create incentives for asset managers to include terminology in their funds’ names designed to attract investor assets. This increasing demand has led to concerns in ESMA. Misleading sustainability disclosures may give rise to risk of “greenwashing”.

This is particularly relevant if funds are named as green or socially sustainable, when sufficient sustainability standards commensurate with that name have not been met. Against this background, ESMA released its final report on guidance for funds’ names with ESG and sustainability-related terms.

Late last year, ESMA provided an analysis of the financial impact of greenwashing controversies, after which Finadium News & Opinion followed up with some questions on how the EU regulatory views short selling and in that context. An ESMA spokesperson said in an emailed reply: “We have not looked specifically into short selling, however the results of the analysis suggest that greenwashing-related short selling activity may be limited given the absence of clear stock price signal around greenwashing controversies.”

Fintech commentary

Yann Bloch, head of Product and Pre-Sales Americas at NeoXam, said in an emailed statement: “When it comes to avoiding greenwashing, firms need to be able to present a full picture of the ESG qualities of their holdings to both investors and regulatory bodies. It is possible that a lack of insight due to data issues could, in many cases, be the reason for unwitting greenwashing, rather than a deliberate attempt to try to mislead investors.

“The average country garden is a mix of weeds and flowers, but without digging a little deeper, the weeds can often go unnoticed. It is the same when it comes to ESG analysis – it is a vastly complex area and without a rigorous and microscopic view of the information that sits beneath particular assets, it is impossible to paint a complete picture.”

Niels Fibæk-Jensen, co-founder and CEO of Matter, a sustainability data and analytics solutions provider, said in an emailed statement: “This move by ESMA is another in a recent line of actions geared towards increasing transparency for investors. To avoid unwittingly greenwashing, investors need to be able to interact directly with the data, to be able to screen for very specific things to be more accurate in their assessments of how an asset fits into a wider ESG investing strategy. This is why we are seeing a push from sophisticated investors towards a lot more granular data than traditional, broad rating and scoring solutions.”


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