ESAs put forward common understanding of greenwashing and warn on risks

The ESAs published their progress reports on greenwashing in the financial sector.
The reports aim to provide a common understanding of greenwashing and the associated risks for market participants in the banking, insurance, pensions, and financial markets.
The ESAs define greenwashing as a practice where sustainability-related statements, actions, or communications do not accurately reflect the underlying sustainability profile of an entity, financial product, or financial service. This can mislead consumers, investors, and other market participants. The ESAs emphasize that greenwashing can occur intentionally or unintentionally and can apply to entities and products within or outside the EU regulatory framework.
To address the issue of greenwashing, the ESAs and NCAs are working together to ensure consumer and investor protection, support market integrity, and maintain a trusted environment for sustainable finance. They aim to coordinate their efforts due to the interconnected nature of the financial system.
ESMA’s progress report specifically focuses on assessing the areas of the SIVC that are most susceptible to greenwashing risks. The report identifies misleading claims related to various aspects of a product or entity’s sustainability profile, such as governance, sustainability strategy, targets, metrics, and impact. It provides sector-specific assessments for key sectors under ESMA’s jurisdiction, including issuers, investment managers, benchmark administrators, and investment service providers.
The report identifies multiple drivers of greenwashing, including challenges faced by market participants in implementing governance processes and accessing high-quality sustainability data. It also acknowledges the need to build sustainability expertise and address the complexities of the regulatory framework.
To mitigate greenwashing risks, market participants are encouraged to make substantiated claims and communicate sustainability information in a balanced manner. The report suggests improving the comprehensibility of sustainability disclosures for retail investors, establishing a reliable labeling scheme for financial products, and enhancing the maturity of the regulatory framework by clarifying key concepts and integrating sustainability impact and engagement.
EBA’s report on Greenwashing aims to understand greenwashing, assess its risks to financial institutions, investors, and consumers, examine the regulatory framework, and identify gaps and challenges. The report highlights the increasing trend of greenwashing in the EU banking sector, its potential impact on financial risks, and the need for effective regulatory and supervisory measures to address it. However, the report does not provide policy recommendations at this stage and serves as a stocktake of the current situation.
EIOPA’s report on Greenwashing underlines that Greenwashing can have negative impacts on consumers and the reputation of insurance and pension providers. Greenwashing can occur at various stages of the insurance and pension sectors. Supervision and regulation are key in tackling greenwashing, and efforts are being made to integrate it into supervisory activities. Still there are gaps and challenges in the regulatory framework that need to be addressed.
The ESAs plan to publish final greenwashing reports in May 2024, which may include recommendations for changes to the EU regulatory framework. They aim to monitor, prevent, and remediate greenwashing risks to ensure the integrity of sustainable finance.