ESG: ESAs requested to advise on prevention of greenwashing

On 30 June 2022, the European Commission published a request for input (dated 16 May 2022) to the three European Supervisory Authorities (ESAs).

What are the ESAs being asked to do?

The request asks them - individually but in a co-ordinated manner - to prepare both a progress report and a subsequent final report on various aspects related to

• greenwashing and its related risks as well as
• the implementation, supervision and enforcement of sustainable finance policies aimed at preventing greenwashing.

Timing?

The timetable for the work is based on the date of the Commission’s letter under which the request for input was sent.

Although the request was published on 30 June 2022, the letter was actually sent to the ESAs on 16 May 2022.

This means that

• the progress report is to be ready by 16 May 2023 (ie, 12 months after the Commission’s letter) and
• the final report is due 12 months later, on 16 May 2024.

What are the reports meant to cover?

(a) General scope

Although each ESA is asked to focus on its own sector, the Commission wants to see the three ESAs coordinating their input and ensuring coherence across the approaches taken for the reports so there is a certain degree of comparability across the reports and their findings.

The Commission has also asked for the reports to be accompanied by a shared summary of key horizontal aspects across all three reports.

The progress reports should “take stock of the work undertaken to date, focusing on how greenwashing is understood and where it may materialize”, looking at actions taken and tools developed to ensure that there is adequate monitoring of greenwashing risks.

The final reports are expected to build on and complement the progress reports for instance, with examples of cases of greenwashing and an assessment of their impact on the financial market. The final reports should also assess the implementation of policies aimed at preventing greenwashing.

As far as possible, the ESAs are to use common terminology on greenwashing across the sectors and to highlight possible deviations to take into account sectoral specificities. This means that the ESAs will have to come up with a common high-level understanding of the key features of the greenwashing and complement that with more specific sectorial definitions where relevant and necessary.

(b) Specific areas

The Commission asks the ESAs to provide input in the following six areas:

1. Greenwashing and greenwashing risks

The ESAs are requested to:

• assess the scale of potential greenwashing and how frequently it occurs in the market
• collect information, where possible, on the most frequent greenwashing occurrences and complaints
• identify and assess risks that greenwashing poses to financial sector entities, investors and consumers
• give a sense of how many occurrences of greenwashing could be undetected and potentially not captured by their information collection
• provide an assessment, if applicable, as to why no occurrences of and complaints have been identified and areas where they see the highest risk of greenwashing. (For this, the ESAs are invited to consider using case studies to highlight where greenwashing risk could emerge.)
• highlight how they plan to monitor and identify greenwashing risks and challenges in the future.

2. Supervisory practices, experience and capacities

The reports are expected to offer an overview and assessment of the most relevant supervisory practices and tools NCAs have developed or are developing to define, capture and address greenwashing cases and greenwashing risks within their remit.

The ESAs are also asked to include ideas and suggestions for the Commission to support the supervisors in their roles, including existing or planned practices related to

• techniques and tools used or which may be used for the identification of greenwashing
• practices developed or being developed to deal with greenwashing occurrences within the EU and with regard to third country firms providing financial services in the EU
• measures used to prevent and remedy greenwashing
• data-requirements to enable the identification of greenwashing

This should be complemented by available international best practices of supervisory processes (such as at IOSCO).

The reports should also provide “an overview and assessment of the current supervisory resources and expertise of financial supervisors in capturing, fighting and preventing greenwashing in the financial market based on their existing or forthcoming legal mandates”.

3. Implementation of sustainable finance policies and supervisory convergence

The Commission wants the reports to include

• the current state of implementation and application of relevant sustainable finance related policies and legislation aimed at preventing greenwashing or address greenwashing risks and
• an assessment of how NCAs are implementing (or intend to implement) the supervisory obligations related to sustainable finance disclosures under the SFDR and Taxonomy Regulation, including how the NCAs prepare for the application and enforcement of upcoming sustainable finance obligations.

4. Supervisory measures and enforcement

Noting that, by the time the reports are delivered, key EU should be in effect (although some will still be work in progress). This allows for an early assessment of what supervisory and enforcement measures are necessary for NCAs to identify, prevent, investigate, sanction and remediate greenwashing in the financial market.

The request for input suggests that this could include:

• supervisory measures being adopted by NCAs and/or challenges in adopting them
• investigatory action by NCAs, even where this does not result in a formal enforcement action or information as to why no investigatory action has taken place
• formal enforcement measures, such as sanctions and other administrative measures
• reports to law enforcement authorities by NCA and any resultant judicial proceedings of which NCAs are aware.

5. Assessment of supervisory obligations and powers

The ESAs are requested to assess whether the current and forthcoming supervisory mandates and toolkits available to NCAs are fit to “identify, prevent, investigate, sanction and remediate possible greenwashing and address greenwashing risks throughout the investment chain and financial product lifecycle” and to enforce legislation aimed at preventing greenwashing.

This will include assessing whether the supervisory mandates, obligations and powers including whether supervisory mandates, powers and obligations of the NCAs

• are coherent and sufficiently address and deter greenwashing and its risks and
• are sufficient to adequately monitor, investigate and sanction greenwashing throughout the investment chain and product lifecycle.

6. Proposals for improvement of the regulatory framework

The request for input asks the ESAs to provide “insight on areas of improvement for the current regulatory framework, based on observed and experienced potential shortcomings” – this could include inconsistencies, conflicting concepts, gaps, etc.in the existing legislation.

What happens next?

Progress reports are meant to be ready by 16 May 2023, the final Reports 12 months later.

Based on the contents of these, the Commission will assess and monitor greenwashing risks in the financial market as key policies are implemented.

It will also consider whether further steps are necessary for the effective supervision and enforcement of greenwashing and risks.