On 4 June 2024, EIOPA issued its final report, which contained its advice to the European Commission (Commission) on greenwashing risks and the supervision of sustainable finance policies (Report).
The Report was issued following a call for advice by the Commission in May 2022, which, in summary, comprised of three parts:
- input from the European Supervisory Authorities (ESAs) on occurrences, cases and complaints of greenwashing practices, combined with an assessment by the ESAs of the scale and frequency of greenwashing;
- the supervision of greenwashing by National Competent Authorities (NCAs); and
- proposals to be provided by the ESAs to improve the current regulatory framework.
The Report serves as EIOPA's final input to the call for advice and addresses the first and second parts of the Commission's requests. EIOPA addressed the first part in its Progress Report on greenwashing dated 31 May 2023.
Defining Greenwashing and Sustainability Claims
As outlined in the Report, greenwashing occurs when an entity makes a misleading sustainability claim. EIOPA defines a "sustainability claim" as "any claim related to the sustainability profile of an entity or product" and may be made by an insurance or pensions provider at any stage in the insurance or pensions' lifecycles. A misleading claim may be intentional or unintentional and may be made in various ways, including selective disclosure, vagueness, and disclosure of outdated information.
According to the Report, the ESAs' understanding of greenwashing relates to practices "whereby the sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services".
The Report finds that EIOPA's interpretation of "sustainability claims" is aligned with the ESAs' interpretation and recommends that NCAs and insurance and pension providers adopt the ESAs' approach as a reference point for monitoring and dealing with greenwashing and sustainability.
Key Findings of the Report
EIOPA conducted a sustainability survey to help examine the implementation of sustainability requirements, the results of which formed part of the Report. 16 NCAs, 89 insurance undertakings and 10 IORPS responded. EIOPA found from this survey that there were gaps in SFDR required disclosures and reporting, the integration of sustainability-related objectives in the Product Oversight and Governance (POG) progress was inadequate (which was notable for non-life insurance products, and the inclusion of sustainability preferences in suitability assessments conducted by Insurance Based Investment Products (IBIPs) distributors in accordance with the EU Insurance Distribution Directive (IDD) was "insufficiently granular and precise".
Other key findings from the Report include:
- All sustainability claims made by insurance and pensions providers should be accurate, substantiated, accessible and up to date.
- Notwithstanding increases in compliance with requirements surrounding sustainability claims, EIOPA is of the opinion that further improvements can be made, particularly in regard to SFDR requirements and POG.
- There is no consistency or alignment among entities in the classification of non-life insurance products with sustainability features, and a lack of standards for such products could lead to heightened greenwashing practices.
- Customers' investments in IBIPS are highly exposed to investments containing sustainability features.
- While there was increased supervision of sustainability requirements and greenwashing between 2023 and 2024, resourcing constraints, a lack of sustainability-related data, the complex regulatory framework and the lack of a common supervisory approach to greenwashing were identified as impediments to the effective supervision of greenwashing. A common approach to the supervision of these practices is required to ensure consistent outcomes in the insurance and pensions sector.
Proposals to Enhance Supervision
EIOPA identified nine key proposals to be deployed to bolster the supervision of greenwashing and to develop and enhance the regulatory framework so that greenwashing practices can be combatted. These are:
- using the ESAs' common understanding of greenwashing as a reference point;
- creating a common supervisory approach to greenwashing and sustainability claims within the EU;
- enhancing supervision and targeted supervisory activities;
- preventing greenwashing;
- enhancing supervisory resources and expertise;
- closing the gap identified in non-life insurance products with sustainability features;
- adopting a consumer-centric approach to sustainability preferences so that all customers (including vulnerable customers) can understand the IDD sustainability preferences criteria;
- having a sustainability-related framework for insurance and pension consumers and providers; and
- enhancing sustainable finance and mitigating greenwashing in the occupational pensions sector.
Opinion
EIOPA issued an opinion on 4 June 2024, addressed to NCAs in conjunction with the Report (Opinion). The Opinion provides a framework for competent authorities to monitor insurance and pension providers' adherence to the common principles when such entities make sustainability claims about themselves, their products, or their schemes.
The Opinion contains four principles focusing on sustainability-based requirements, which are:
- Principle 1: Sustainability claims made by an insurance or pensions provider should be accurate and precise and should fairly represent the provider's profile and/or the profile of its products.
- Principle 2: Sustainability claims should be substantiated with clear reasoning, facts and processes.
- Principle 3: Sustainability claims and their substantiation should be accessible to the targeted stakeholders.
- Principle 4: Sustainability claims should be kept up to date, and any material change should be disclosed in a timely manner and with a clear rationale.
The need to monitor sustainability claims by NCAs to combat greenwashing is emphasised in the Opinion along with actions NCAs should take, including:
- evaluating sustainability claims throughout each stage of the insurance and pensions lifecycle;
- monitoring compliance with existing and incoming regulatory requirements and each of the principles; and
- enhancing the scrutiny of insurance and pensions products with sustainability-related terms in their name.
Collaboration between NCAs and other authorities is also recommended to monitor greenwashing practices.
EIOPA will commence monitoring actions taken by NCAs 24 months after the date of the Opinion.
Conclusion
The report identifies that the impact of greenwashing can be severe for both consumers and undertakings. Although some NCAs and undertakings have taken positive actions against greenwashing, the Report clearly states that ongoing improvement at the supervisory level is required to tackle greenwashing.
While the Commission's next steps following EIOPA's advice are awaited, insurance and pensions providers should consider the report's findings and ensure that any sustainability claims made are not misleading to avoid consumer detriment and reputational damage.
For further information on this topic, please contact a member of the William Fry Insurance team.
Contributed by Martha Ní Dhochartaigh.
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