Greenwashing: the ESAs understanding

On 1st June 2023, 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) – released their Progress Reports on Greenwashing in the financial sector. These reports present a common high-level understanding of greenwashing applicable to market participants across their respective areas of oversight, including banking, insurance and pensions, and financial markets, which echoes true in our recent research on the matter.

Common Understanding of Greenwashing

The ESAs define 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 European Commission broadly refers to “sustainability claims”, covering not only environment-related claims, but also claims related to social and governance aspects. This reflects the integrated approach EU legislation has been taking, to ensure that activities or investments labelled as sustainable do not contribute to any sustainability objectives to the detriment of another.

Importantly, the ESAs emphasize that sustainability-related misleading claims can transpire and disseminate 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 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 – as well as highlighting risk areas, causes of greenwashing, and preliminary remediation actions.

Preliminary remediation actions

Further, the report identifies preliminary remediation actions including:

• Reinforce the regulatory framework by clarifying key concepts like “contribution to sustainable objective” and “impact.”
• Upgrade firms’ governance and IT systems by implementing monitoring systems, regular reporting on progress, and independent verifications to ensure balanced and substantiated communication of sustainability information.
• Ensure reliable sustainability data by increasing external validation and assessment and seeking clarification on ESG methodologies and the level of ambition behind sustainability claims.
• Establish a labelling scheme for sustainable financial products to enhance comprehension for retail investors.

The National Competent Authorities (NCAs) and the ESAs are 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. The ESAs’ shared understanding of greenwashing represents a significant step in combating this harmful practice within the financial sector. By acknowledging the risks, providing a comprehensive definition, and coordinating efforts across regulatory bodies, the ESAs aim to safeguard the interests of consumers and investors, uphold market integrity, and cultivate a trustworthy environment for sustainable finance.

Next Steps

The ESAs will publish the final greenwashing reports in May 2024, which may include changes to the EU regulatory framework. In the meantime, ESMA is expanding its monitoring framework to address greenwashing risks and supporting national Competent Authorities (NCAs) who play a frontline role in addressing greenwashing-related complaints.

If you are concerned about your firm’s greenwashing risks we are here to help you. Our SFDR Diagnostics Software assesses your firm’s public disclosures and policies at both entity and product level and provide a RAG assessment of findings, along with actionable insights. This means you can be comfortable knowing the consistency, accuracy and accessibility of your disclosures. Get in touch with Coralie Nelson (cnelson@novatusadvisory.com) to find out more.