Final reports from ESMA, EBA and EIOPA on greenwashing in the financial sector

The European Supervisory Authorities (the “ESAs”) (EBA, EIOPA and ESMA) has published their final reports on greenwashing in the financial sector.

The reports are the ESAs response to the European Commission’s request to provide input on the phenomenon of greenwashing, including its most relevant types and occurrences, risks that greenwashing poses, supervisory practices, gaps and changes in aggressing these risks.

The reports include a common understanding of greenwashing and status of the current supervisory response to greenwashing risks. The ESAs states that the financial market players have a responsibility to provide sustainability information that is fair, clear and not misleading. The ESAs encourage an enhanced supervision and calls for an improved market practice on sustainability-related claims.

Common understanding of greenwashing

The ESAs reiterates their common high-level understanding of greenwashing as a practice whereby sustainability-related statements, declarations, actions or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product or service. This practice may be misleading to consumers, investors or other market participants.

European Securities and Markets Authority (“ESMA”) Final Report

The report presents several key findings on greenwashing in relation to issuers, investment managers, investment service providers and benchmarks administrators. ESMA concludes in the report that the National Competent Authorities (“NCAs”) only have reported and detected a limited number of actual or potential occurrences of greenwashing. This may however reflect several factors such as a low level of complaints and limited financial literacy and constraints son the NCA’s resources and detection.

ESMA sets out general recommendation to the NCAs including adapting their organizational structure to the needs of sustainability related supervision, considering investing in access to data and SupTech tool (digitals tools for supervision such as web-scraping tools), and further integration of greenwashing risk into their risk-monitoring framework to gradually deepen their critical scrutiny of sustainability-related claims.

The final report from ESMA can be accessed here.

European Banking Authority (“EBA”) Final Report

The report from EBA focuses mostly on the banking sector and covers investment firms and payment services providers to a more limited extent. The final report concludes that the greenwashing risk to banks remain overall stable and that reputational and operational risk are still considered as the types of financial risks most impacted by greenwashing, which is in line with the fact that litigation risk resulting from greenwashing has been in a rising trend in the last three years.

EBA sets out several actions and measures that institutions should notice and implement in order to avoid greenwashing, such as:

• review and adapt governance arrangements and internal processes to build safeguards against greenwashing,
• consider the extent to which external verification and alignment with market guidance would support the credibility of green and sustainable products and/or targets,
• draft credible plans and strategics with clear and granular information on their green and sustainable finance targets and risks,
• focusing on finalization and implementation of the existing and planned legislative framework to address greenwashing.

The final report from EBA can be accessed here.

European Insurance and Occupational Pensions Authority (“EIOPA”) Final Report

EIOPA has assessed the status of implementing of the current sustainability requirements. In relation to the Sustainable Finance Disclosure Regulation (“SFDR”), EIOPA sees room for improvement particularly regarding article 10 requirements. EIOPA also finds that several providers classify their non-life insurance products as having sustainability features or as being “green”, but due to a lack of standards in relation to non-life products with sustainability features it can lead to a higher risk of greenwashing. Further EIOPA has noticed an increase in supervisory attention around sustainability-related requirements and greenwashing between 2023 and 2024.

EIOPA lays out nine key proposals aimed at enhancing the supervision of greenwashing and at improving the sustainable finance regulatory framework, including using the ESAs common understanding of greenwashing as reference point, tackling greenwashing through enhanced supervision and targeted supervisory activities and a sustainability-related investment framework that works for insurance and pension consumers and providers.

The final report from EIOPA can be accessed here.

Tags:  Sustainability