In a move reflective of its commitment to promoting transparency in the European Union’s financial markets, the European Securities and Markets Authority has provided an insightful look into the risks and ramifications of greenwashing. This is particularly crucial, given the rapid expansion of environmental, social and governance-related financial products and markets within the EU.
The report emphasised the need for a rigorous regulatory framework, accurate sustainability representations, and the challenges faced in assimilating sustainability expertise and producing high-quality data.
The , issued this week, drew attention to the fact that sustainability-related misleading claims, commonly known as greenwashing, can arise either intentionally or inadvertently.
These claims may relate to entities and products that either fall under the EU regulatory framework or stand outside it. The report reiterated the need for clarity, highlighting the challenges of misleading sustainability claims which can sway investors, potentially leading them astray.
Rise in greenwashing
According to Esma, . With a limited pool of assets deemed genuinely sustainable, especially those aligned with the EU Taxonomy Regulation’s stringent standards, there’s an observable competitive drive among market participants. This drive pushes entities to amplify their sustainability profiles, which may sometimes be misleading or not wholly accurate.
Regulatory framework
The European Commission had the importance of preventing greenwashing, and in May 2022, issued a “Request for input related to greenwashing risks and the supervision of sustainable finance policies" to the three European financial supervisory authorities. This request sought clarity on the definition of greenwashing, its manifestations in the financial sector, its associated risks, the enforcement of sustainable finance policies designed to counteract it and suggestions for enhancing the regulatory framework.
At the core of Esma’s report is the objective to foster a better understanding of greenwashing, its potential adverse effects on the EU financial markets and investors, and the evaluation of areas within the sustainable investment value chain that may be more susceptible to greenwashing risks.
Definition and risk assessment
One significant revelation from the report is the identification of three key roles market participants can play in relation to greenwashing: as a trigger, spreader or receiver of misleading sustainability claims.
The report also pointed out that such misleading claims can revolve around various key aspects of a product or entity’s sustainability profile. This includes aspects like ESG governance and resources, ESG strategy and sustainability impact, among others.
The report further broke down the risks associated with greenwashing across various sectors, highlighting the unique challenges faced by issuers, investment managers, benchmarks producers and investment service providers.
Remediation and clarification
Esma is already taking steps to address these risks by coordinating supervision efforts across the EU. The authority has identified “ESG disclosures” as a Union Strategic Supervisory Priority, indicating a concerted push towards ensuring the consistent implementation of the sustainable finance framework.
Building on this progress report, a final report is expected to be published in May 2024, which will include final recommendations and potential amendments to the EU regulatory framework.