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ESG Insights: October 2023 edition
ESMA Progress Report on Greenwashing in EU Financial Sector
‘Greenwashing’ — where sustainability-related statements, declarations, actions, or communications don’t fairly and clearly reflect the underlying sustainability profile of an entity, product or service — has become an area of significant concern, particularly in the European financial sector.
In May 2022, the European Commission issued a request to European Supervisory Authorities (ESAs) to help them combat greenwashing. The Commission wanted to gain clarity on the definition of greenwashing, how it manifests in the financial sector, associated risks, enforcement of sustainable finance policies to counteract it, and means to strengthen the regulatory framework.
The European Securities and Markets Authority (ESMA) produced a detailed report in response to this request providing information on the risks of greenwashing and the supervision of sustainable finance policies.
Their report emphasises that greenwashing is of significant concern, and as the demand for ESG-related products increases, so too does the risk of greenwashing.
Across the EU, and globally, there has been more demand than ever for financial products that are ESG-focused. However, there is a limited amount of genuinely sustainable assets available, particularly those that would be aligned with the standards of the EU Taxonomy Regulation, which leads to increased competition amongst market participants. In order to compete, some entities may seek to ‘enhance’ their sustainability profile, and on occasion what they present may not be wholly accurate and may even be intentionally misleading.
ESMA Progress Report on Greenwashing in EU Financial Sector
‘Greenwashing’ — where sustainability-related statements, declarations, actions, or communications don’t fairly and clearly reflect the underlying sustainability profile of an entity, product or service — has become an area of significant concern, particularly in the European financial sector.
In May 2022, the European Commission issued a request to European Supervisory Authorities (ESAs) to help them combat greenwashing. The Commission wanted to gain clarity on the definition of greenwashing, how it manifests in the financial sector, associated risks, enforcement of sustainable finance policies to counteract it, and means to strengthen the regulatory framework.
The European Securities and Markets Authority (ESMA) produced a detailed report in response to this request providing information on the risks of greenwashing and the supervision of sustainable finance policies.
Their report emphasises that greenwashing is of significant concern, and as the demand for ESG-related products increases, so too does the risk of greenwashing.
Across the EU, and globally, there has been more demand than ever for financial products that are ESG-focused. However, there is a limited amount of genuinely sustainable assets available, particularly those that would be aligned with the standards of the EU Taxonomy Regulation, which leads to increased competition amongst market participants. In order to compete, some entities may seek to ‘enhance’ their sustainability profile, and on occasion what they present may not be wholly accurate and may even be intentionally misleading.
ESMA’s report assessed the risks of greenwashing and identified three main roles market participants may fall into relating to greenwashing – trigger, spread, or receiver of a misleading claim. These roles highlighted how important it is to ensure each market participant carries out their due diligence responsibilities.
They also found that misleading claims can relate to all main aspects of the sustainability profile for a product/entity/service, including ESG performance metrics and targets, strategy, policies, credentials and sustainability impact.
The most seen greenwashing claims stem from a variety of omissions, ambiguity, empty claims, cherry-picking facts, and a misleading use of ESG terminology. They also reported that marketing materials, labels and voluntary reporting were more at risk from greenwashing than regulatory documents.
Greenwashing was found to result from a variety of many inter-related drivers, and as the current regulatory framework develops, it is clear that it needs to be more effective and consistent.
They also found that misleading claims can relate to all main aspects of the sustainability profile for a product/entity/service, including ESG performance metrics and targets, strategy, policies, credentials and sustainability impact.
The most seen greenwashing claims stem from a variety of omissions, ambiguity, empty claims, cherry-picking facts, and a misleading use of ESG terminology. They also reported that marketing materials, labels and voluntary reporting were more at risk from greenwashing than regulatory documents.
Greenwashing was found to result from a variety of many inter-related drivers, and as the current regulatory framework develops, it is clear that it needs to be more effective and consistent.
ESMA has identified a reinforced regulatory framework, as one of the key actions in addressing greenwashing. There already exists an obligation on market participants to make substantiated claims and communicate sustainability information in a balanced manner. However improved regulation that provides clarification on key concepts and expands on areas such as engagement, sustainability, impact and transition finance could be useful. They also call for greater transparency on ESG data methodologies, the use and calculation of estimates, external verification and auditing, in order to enhance the data’s reliability.
A suggestion also made in the report is that the adoption of a reliable labelling scheme could be considered for financial products.
Greenwashing risks were found to be a Union Strategic Supervisory Priority, so National Competent Authorities have been coordinating supervision and actions to support the effective and consistent implementation of sustainable finance.
There will be a final report published in May 2024, which will seek to provide a look at existing supervisory powers, resources and actions to address greenwashing risks.
This information is correct at time of publication on 9th October 2023.
A suggestion also made in the report is that the adoption of a reliable labelling scheme could be considered for financial products.
Greenwashing risks were found to be a Union Strategic Supervisory Priority, so National Competent Authorities have been coordinating supervision and actions to support the effective and consistent implementation of sustainable finance.
There will be a final report published in May 2024, which will seek to provide a look at existing supervisory powers, resources and actions to address greenwashing risks.
This information is correct at time of publication on 9th October 2023.
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According to a 2022 KPMG report, 69% of business leaders reported an increase from their stakeholders, including investors and customers, in ESG reporting transparency — and that pressure is only increasing.
Our brand-new ESG Insights is a monthly newsletter that will cut through the noise and tell you what you need to know about this ever-present topic. This newsletter will:
✓ Simplify legislation updates
✓ Bust some of the myths
✓ Let you know what has (or hasn't!) changed in the last month
✓ Keep you up to date with a complex topic
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