Green Finance Advisor of Friends of the Earth (HK)
Following the European Commission’s request, the European Supervisory Authorities (ESAs) published their Progress Reports on greenwashing in the financial sector on Jun 1, 2023. The three ESAs are EBA (European Banking Authority), EIOPA (European Insurance and Occupational Pensions Authority) and ESMA (European Securities and Markets Authority), who regulate the European banking, insurance and capital markets sectors. The ESAs put forward their views on where they see greenwashing occurring, including a common high-level understanding of what they consider to be greenwashing.
The ESAs define 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.” They also mention “sustainability-related misleading claims can occur and spread either intentionally or unintentionally.”
In particular, the ESMA progress report* provides sector-specific assessment for key sectors for issuers, investment managers, benchmark administrator and investment service providers, while states 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.”
The report also provides some potential remediation actions to the identified greenwashing drivers and risks. It suggests improvement to be made in the sustainability disclosures and the labeling scheme for financial products for retail investors. A more robust regulatory framework and clarifications on the key concept (i.e. transition investors) should be the key to support better integration of sustainability impact and engagement efforts.
Last but not least, it highlights the needs for establishing reliable and comprehensive sustainability data, including recourse to external validation and assessment of the ambition and creditability of sustainability commitment/pledges (such as the Science-Based Target Initiative (SBTi), clarifications and transparency of ESG data methodologies and minimum standards for the quality of estimates of ESG data.
As for the next steps, the ESAs will publish their final greenwashing reports in May 2024 and will consider final recommendations, including on possible changes to the EU regulatory framework.