ESG Greenwashing Highlighted in ESMA's Final Report

On 4 June 2024, the three European Supervisory Authorities (ESMA, the EBA and EIOPA) separately published Final Reports on greenwashing in the financial sector.

ESMA's Report can be found here

The three reports take a co-ordinated approach on greenwashing risks, outlining each ESA's current supervisory response to greenwashing risks and reiterating the common high-level understanding of greenwashing as a practice by which sustainability-related statements, declarations, actions, or communications fail to clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services.

Each report also provides a forward-looking view of how sustainability-related supervision can be gradually enhanced in the future. 

ESMA's Final Report - key findings

• NCAs are already taking steps to prioritise the supervision of sustainability-related claims. In general, such supervision complements the oversight provided to other key components of the Sustainable Investment Value Chain (SIVC).

  The internal governance of supervised entities plays an important role in ensuring compliance with the relevant requirements.

• NCAs and ESMA have been implementing a risk-based approach to supervision, focusing supervisory attention and resources on the most significant risks.

• As a form of miscommunication or misconduct, greenwashing can be captured by existing EU rules prohibiting misleading information but it can also be addressed by acting on infringements against a series of specific sustainability-related requirements introduced in the EU in recent years.

• To date, NCAs have detected only a limited number of actual or potential occurrences of greenwashing.

  This may reflect multiple factors - a low level of signals (such as complaints) reaching the NCAs, constraints on NCAs' expertise for detection or NCAs' difficulties to access good quality data - or may reflect early successes by NCAs in preventing greenwashing in certain areas.

• Formal enforcement decisions have also been limited as NCAs have tended to address irregularities in sustainability-related claims as part of their ongoing supervision. They have also generally favoured a gradual approach, leading market participants through the implementation of a new, complex regulatory framework.

• To build the necessary specialised knowledge, NCAs and ESMA have made use of training programmes, recruitment, cooperation with relevant national agencies or dialogue with non-governmental organizations. Most NCAs, though, feel that their resources are insufficient.

• To supervise effectively, NCAs need access to relevant, high-quality and comparable data. Almost unanimously, NCAs identified access to data as a challenge in at least one SIVC sector, with data referring either to information

  • that is the subject of supervision (e.g., regulatory disclosures, certain advertisements) or

  • that can serve supervisors in their work (e.g., news reports, data on sustainability profile of funds' underlying assets).

  A growing number of NCAs are considering purchasing third-party data to assist their supervision.

• SupTech tools may increase supervisory efficiency, without replacing professional judgment exercised by supervisors. Only a few NCAs reported having used SupTech tools so far, although most are either already developing such toolsor considering doing so in the future.

Why has ESMA published a Final Report?

In its July 2021 Renewed Strategy for financing the transition to a sustainable economyandAnnex, the European Commission noted that it expected the ESAs to play an essential role in identifying, preventing, investigating, sanctioning and remediating greenwashing.

On 16 May 2022, the Commission requested input from the ESAs on greenwashing risks and supervision of sustainable finance policies. See our report here.

Each ESA was required, separately but in a coordinated manner, to provide input on

• greenwashing risks and occurrences in the EU financial sector; and

• the supervisory actions taken and challenges faced to address those risks.

The ESAs' Call for Evidence (15 November 2022) closed on 10 January 2023. See our report here,

ESMA published a progress report on 31 May 2023 and has now followed this up with its Final Report.

What happens next?

ESMA's Final Report notes that it will

• will continue to monitor greenwashing risks and supervisory progress; and

• publish an Opinion setting out its views on how the EU regulatory framework for sustainable finance "could further facilitate the investors' journey".