Stockholm (NordSIP) – In May last year, the European Commission issued a “Request for input related to greenwashing risks and the supervision of sustainable finance policies” to the three European Supervisory Authorities (ESAs) – the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA). The EC is seeking input on the definition of greenwashing in the financial sector, on the risks it poses to investors and financial markets, on implementing sustainable finance policies aimed at preventing the undesirable practice, and on potential improvements to the regulatory framework.
Responding to this request, on 1 June, the ESAs published their Progress Reports on Greenwashing in the financial sector. Although ESMA, EBA, and EIOPA are quite unanimous in their interpretation of greenwashing, each makes a point of highlighting the specific circumstances and risks relevant to the sector they represent.
A common understanding
At a high level, all three authorities understand greenwashing as a practice where sustainability-related statements 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. They also highlight that such sustainability-related misleading claims can occur and spread either intentionally or unintentionally.
The ESAs pledge to help the National Competent Authorities (NCAs) to ensure consumer and investor protection and market integrity and maintain a trusted environment for sustainable finance. Given the integrated nature of the financial system, the ESAs are highly aware of the need to work in a coordinated manner to address greenwashing.
Greenwashing’s different faces
Each authority’s report provides sector-specific assessments for key sectors under their remit. In ESMA’s case, the focus is on issuers, investment managers, benchmark administrators and investment service providers. EBA’s analysis looks at the impact of greenwashing on banks, investment firms and payment service providers. EIOPA’s progress report, meanwhile, provides initial views on greenwashing from an insurance and pension perspective.
ESMA’s 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. To mitigate greenwashing risks, ESMA prescribes comprehensible sustainability disclosures to retail investors and the establishment of a reliable and well-designed labelling scheme for financial products.
According to EBA, pledges about future ESG performance are the most prone to greenwashing, followed by ESG strategy and objectives of entities, as well as ESG labels and certificates. The banking authority finds that regulatory developments, such as the EU taxonomy and ESG disclosures and a set of provisions in EBA Guidelines, are likely to contribute to tackling the problem. Challenges remain, however, as the sustainable finance regulatory framework is still at an early stage of implementation, and the benefits of some rules are not fully visible yet.
Greenwashing substantially impacts insurance and pension providers and their consumers, according to EIOPA. Presenting concrete examples to show how this manifests itself in practice, the authority concludes that greenwashing can occur as part of the broader set of conduct risks at all stages of the insurance (e.g., entity level, product manufacturing, delivery, and management) and pensions (e.g., scheme design, delivery and management) lifecycles.
The three ESAs are to publish final greenwashing reports in May 2024, formulating their final recommendations, including possible changes to the EU regulatory framework.
