Europe’s top financial regulators on Thursday presented a first official definition of greenwashing as part of a common approach for cracking down on greenwashing practices among banks, asset managers and insurance companies, turning up the pressure on an industry that has for a long time been complaining about the lack of clarity of the EU’s sustainable finance regulations.
One of the major elements of the supervisory perspective, outlined in a total of 236 pages in three separate reports, is a first attempt at more closely defining greenwashing. Bank regulator EBA, securities body Esma and insurance authority Eiopa - jointly known as the European supervisory authority, or ESAs - said they for their joint definition of greenwashing that serves “as a shared reference point” for regulators and market participants and other stakeholders, and not as a text to be inserted into EU law.
“The ESAs understand 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 said.
Guidance for national supervisors
The definition of greenwashing also lays the foundation for specific actions against firms engaging in greenwashing by national financial supervisors in the EU supervisory network, such as the CSSF in Luxembourg, FSMA in Belgium and AFM in the Netherlands. According to the ESAs, the progress reports also can serve as guidance for the national authorities.
Concerns over greenwashing in Europe’s financial sector have become a major topic of discussion over the course of the last twelve months. They follow last year’s raids on offices of Deutsche Bank and DWS in Frankfurt, a huge wave of ‘downgrades’ of investment funds classified under the EU’s SFDR sustainable finance disclosure rules and various media reports exposing a number of specific greenwashing cases. Some investment firms now have become reluctant to speak about their sustainable finance products and services.
The developments last year led to an official call for evidence at EU level that actively solicited input from the industry. Based on that feedback from the industry, the EU supervisors are due to present a final report in 2024. Each supervisor on Thursday released its own ‘progress report’ on greenwashing as an intermediate step.
Intentional and unintentional
“In general, greenwashing appears to result from multiple inter-related drivers,” Esma said in its report. “While the regulatory framework is gaining in maturity, implementation challenges point to the need to enhance its effectiveness and consistency. For (national authorities), supervising sustainability-related information presents challenges, for example in building sustainability expertise.”
The authorities said they recognize that misleading sustainability-related claims can “occur and spread either intentionally or unintentionally” and that they can relate to entities and products that are either within or outside the remit of the EU regulatory framework.
At a background briefing for journalists, the authorities made clear that unintentional greenwashing was basically just as bad as intentional greenwashing, saying that it is the final result that matters most: protecting clients and consumers and standing up for the protection of investors.
EU framework evolving quickly
The ESAs said it was not possible to say whether there has been an increase in greenwashing activities during recent years, given that it is the first time they elaborately reported on this topic.
According to an EBA representative speaking on background, the EU’s sustainable finance framework is evolving quickly and also provides banks and financial institutions with various options to prevent and mitigate greenwashing. So far, EBA has not identified enforcement actions but it sees a range of supervisory activities undertaken at the moment.
Insurance authority Eiopa has identified some 400 financial products that have sustainability in their product names that could be subject to greenwashing, a spokesman said during the briefing. These relate to 1.6 million contracts worth about 4 billion euro.