While the search is still on for a common European level regulatory model, ESMA is already preparing for the fight against greenwashing. ESMA notes that the growing demand for ESG investments and the rapid evolution of markets in this area are leaving more and more room for abuse.
Advancing the sustainability agenda is crucial for ESMA, particularly as investor preferences shift to environmentally friendly financial products and the European Union strives to meet its commitments on tackling climate change .
ESMA has now published a roadmap on sustainable finance in which it sets out the basis of its strategy to tackle greenwashing. "Advancing the sustainability agenda is crucial for ESMA, particularly as investor preferences shift to environmentally friendly financial products and the European Union strives to meet its commitments on tackling climate change," says Verena Ross, ESMA's Chair.
A good strategy must first and foremost be based on an analysis of the objectives to be achieved. In this case, ESMA notes that greenwashing is “a complex and multifaceted issue which takes various forms, has different causes and has potential to detrimentally impact investors looking to make sustainable investments.” In order to protect investors, ESMA has embarked on an in-depth analysis of the problem.
The entire investment chain affected
Regardless of the intention of the action or omission, the European regulator considers greenwashing to be a market practice aimed at not correctly reflecting the sustainable profile of an issuer, an instrument or a financial product. Such manipulation is potentially detrimental to investors wishing to allocate part of their resources to sustainable investments.
As greenwashing is often identified as misrepresentation or mislabelling or even mis-selling, the Financial Conduct Authority explains that these are only superficial symptoms seen from the perspective of the end investor. "The causes of greenwashing can involve multiple aspects of the investment value chain, sometimes affecting the nodes of that chain long before the investment is made," the roadmap notes. In this regard, ESMA cites the example of an issuer providing dubious information to the markets or an EU-domiciled investment fund with poor quality data on companies incorporated in third countries.
Include national supervisors
As with the divergent application of anti-money laundering rules within each member state, ESMA points out that regulatory arbitrage can also encourage greenwashing. The different rules categorising green financial products within the European single market could indeed pose risks to investor protection. This could result in a lack of comparability or transparency, or even mis-selling.
In order to tackle this more effectively, ESMA expects national regulators to develop their expertise beyond their traditional areas of intervention. “The roadmap is a milestone for our sustainable finance work, identifying the priority work we will do to ensure that ESMA and national supervisors take ambitious action on priority sustainable finance issues," said the chair of the European regulator.
The roadmap is a milestone for our sustainable finance work, identifying the priority work we will do to ensure that ESMA and national supervisors take ambitious action.
To support national authorities in new ways of supervising markets, ESMA says it is committed to building its capacity in sustainable finance with a multi-annual training programme and knowledge sharing between Member State supervisors. The European regulator will also put its data analysis power to work to identify emerging trends, risks and vulnerabilities that could undermine investor protection and financial market stability.
This story was first published in French on Paperjam. It has been translated and edited for Delano.