Last month,the European Supervisory Authorities (EBA, ESMA and EIOPA – together, the ESAs) each recently published their Final Reports to the European Commission on greenwashing in the financial sector. The reports have been published in response to the request from the European Commission in 2022 to the ESAs for a coordinated input on greenwashing risks and the supervision of sustainable finance policies. The ESAs confirm their common understanding of greenwashing as "a practice where 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. This practice may be misleading to consumers, investors, or other market participants".
Key Remediation Actions
The ESMA Final Report (the most relevant for fund managers) provides a summary of remediation actions for managers, regulators and the European Commission to consider.
Remediation actions for managers to consider include:
- Substantiate sustainability-related claims and communicate sustainability information in a manner that is fair, clear, and not misleading.
- Consider high-risk areas for greenwashing as identified by ESMAs progress report published in June 2023. High-risk areas include ESG strategy, objectives and characteristics; ESG labels; ESG performance and metrics; and pledges about future ESG performance.
- Implement monitoring processes and report regularly on progress.
- Invest in building capacities and expertise and IT systems fit for managing the new flow of sustainability information.
- Adapt governance structures and processes to mitigate greenwashing risks for example committees and guidance.
- Exercise caution with the use of aspirational language in advertising.
- Fulfil due diligence responsibilities on ESG data with the same level of ambition and care as for financial information.
- Contribute to addressing financial and sustainability literacy gaps among retail investors (e.g., through providing contextual disclosures).
In addition to the remediation actions set out for managers and regulators, ESMA also invites the European Commission to consider specific remedial actions to support the use of supervisory powers including to quickly adopt the Regulatory Technical Standards in order to improve access to machine-readable SFDR disclosures to help foster the use of supervisory technology tools. ESMA further invites the European Commission to give ESMA a mandate to develop guidelines on marketing communications and to incorporate a provision prohibiting misleading information by including a clear reference to "clear, fair and not misleading information" under the benchmark regulation.
Next Steps
ESMA has committed to continuing to develop indicators to monitor greenwashing risks, to explore the deployment of supervisory technology tools and to launch a Common Supervisory Authority on the integration of sustainability in firms' suitability assessment and product governance processes and procedures in 2024. ESMA will also publish a separate opinion which will address how to improve the EU regulatory framework in order to address certain usability and consistency issues which is expected to build upon on the recently published joint ESA opinion on SFDR.
Fund managers should review the report and consider updating their policies and procedures as well as ensuring fund materials are carefully considered against the recommendations. ESMA is not alone in its focus on mitigating greenwashing. As mentioned in an earlier post FCA ESG developments this is also a focus for the FCA in the UK who introduced an anti-greenwashing rule at the end of May this year.
Eloise Edwards-Hedges, paralegal, also contributed to this article.
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