The European Supervisory Authorities (ESA) have defined greenwashing applicable to banking, insurance, pensions and financial markets, and highlighted some of the risks that could lead to it.
The ESA comprises the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).
They describe 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”.
They said that banks, insurers and investment firms across the European Union have made “misleading claims” about their sustainability credentials to investors.
For example, there are banks and investors promoting their support for initiatives such as clean energy while failing to say they also have financed projects linked to fossil fuels, deforestation and human rights abuses, according to the EBA.
Greenwashing is not a new problem but has come to the fore as sustainable investing has increasingly become mainstream.
To mitigate greenwashing risks, an ESMA report on the risks of greenwashing stated, market participants across the sustainable investment value chain (SIVC) have to live up to their responsibility to make substantiated claims and communicate on sustainability in a balanced manner.
It added that comprehensibility of sustainability disclosures to retail investors needs to be improved, including by establishing a reliable and well-designed labelling scheme for financial products.
It also noted the regulatory framework needs to gain in maturity, key concepts need to be clarified and sustainability impact or engagement better integrated.
The ESAs will publish final greenwashing reports in May 2024 and will consider final recommendations, including on possible changes to the EU regulatory framework.
Although this greenwashing definition is from the ESAs, they pointed out, given the integrated nature of the financial system, they work in a coordinated manner to address greenwashing with domestic regulators.
This is in order to “meet expectations from stakeholders to ensure consumer and investor protection, support market integrity and maintain a trusted environment for sustainable finance”.
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