European financial regulators have called for increased oversight, refined market standards, and a coordinated global response to ensure sustainability claims are fair and not misleading in a widely anticipated report on greenwashing.
The three European supervisory authorities--European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority--unveiled their final findings on greenwashing within the financial industry on Tuesday 4 June 2024. These findings underscore a united strategy by the ESAs in addressing greenwashing risks, stressing the importance of heightened oversight and refined market standards regarding assertions related to sustainability.
Greenwashing
The ESAs defined greenwashing as the practice where sustainability-related statements, declarations, actions or communications fail to clearly and fairly reflect the underlying sustainability profile of an entity, financial product or financial services. Such practices can mislead consumers, investors or other market participants. The ESAs reiterated that financial market players must provide sustainability information that is fair, clear and not misleading.
Each ESA reported on the current supervisory response to greenwashing risks within their remit, noting that national competent authorities (NCAs) have already taken steps in supervising sustainability-related claims. Additionally, the ESAs provided a forward-looking view on enhancing sustainability-related supervision in the coming years. While focusing on the EU’s financial sector, the ESAs acknowledged the necessity for a global response, involving close cooperation among financial supervisors and the development of interoperable standards for sustainability disclosures.
Esma’s final report
The Esma that supervising sustainability-related claims has become a priority for NCAs. Both NCAs and Esma have initiated steps to better monitor and detect greenwashing, scrutinising sustainability-related claims across various sectors. Several common supervisory actions have been launched to ensure effective and consistent supervision. Despite these efforts, NCAs still face constraints regarding resources, access to expertise and quality data.
Verena Ross, Esma chair, stated in the agency’s announcement, “Effective and consistent supervision of sustainability-related claims is critical to investor protection and a trustworthy environment for ESG markets. With a risk-based approach in mind, ESMA has promoted EU-level common supervisory actions across the sustainable investment value chain and will continue to foster convergent and effective supervision. We will also continue to support NCAs, to enhance supervisory capacities in this area and invest in the tools needed to address data challenges.”
Ross reminded market players of their responsibility to avoid making unsubstantiated sustainability claims and to communicate any sustainability-related information fairly, clearly and without misleading.
Priority actions
Esma outlined several priority actions to mitigate greenwashing risks:
– Deepening critical scrutiny: NCAs are expected to gradually deepen their scrutiny of sustainability-related claims by increasing human resources and expertise, investing in supervisory tools like suptech (supervisory technology) solutions, and embedding greenwashing risks in their supervisory work programmes.
– Support and monitoring: Esma will continue to support the monitoring of greenwashing risks, deploy suptech tools and build capacity. Additionally, Esma will prompt common supervisory actions when necessary and may produce further guidance for market participants and supervisors in high-risk areas of greenwashing.
– Legislative support: The European Commission is invited to reinforce the mandates of NCAs and Esma in certain areas, such as benchmarks, and ensure that all NCAs have the power to promote retail investors’ financial education. The commission should also ensure the legislative framework supports NCAs’ access to data.
Looking ahead
Esma said that it will continue to monitor greenwashing risks and supervisory progress, including via the ongoing union strategic supervisory priority on “ESG Disclosures.” Building on preliminary regulatory remediation actions identified in the progress report, Esma plans to publish an opinion on how the EU regulatory framework for sustainable finance could further facilitate investors’ journeys.
The final reports from , and are available on their websites.