ESMA, the EBA and EIOPA (the ESAs) published their Progress Reports yesterday on greenwashing in the financial sector.

This followed a request for their input from the European Commission in May 2022 on the occurrence of greenwashing, the potential for greenwashing risks, and related supervisory matters.

The ESAs issued a call for evidence to assist them in their work in November 2022 (read our insights here: ESG Update: ESAs call for evidence on greenwashing). Yesterday's reports are the first key deliverables, with final reports expected at the end of May 2024.

In their respective press releases, the ESAs set out their common understanding of greenwashing as being "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".

In their individual reports, the ESAs examine greenwashing risk by reference to the entities within their remit:

ESMA Report

Market participants can play one or more of 3 main greenwashing-related roles: trigger, spreader, and/or receiver of a misleading claim. Misleading claims can relate to all key aspects of a product's / entity's sustainability profile e.g. ESG governance and resources; ESG strategy, policies and credentials; ESG performance metrics and targets; and sustainability impact.

The most widespread misleading qualities are cherry-picking, omission, ambiguity, empty claims (including exaggeration), and misleading use of ESG terminology. Marketing materials are most impacted, but while regulatory documents are less exposed to greenwashing risk they shouldn't be overlooked.

The ESMA report looks at issues specific to issuers, investment managers, benchmarks, and investment service providers.

For NCAs, supervising sustainability-related information presents challenges e.g. building their sustainability expertise.

Market participants have difficulties producing and accessing relevant, high-quality sustainability data.

Retail investors face challenges in making informed decisions in light of the of the sustainable finance framework, ESG literacy gaps and a fragmented labelling landscape.

Possible remediation actions include updates to the regulatory framework to clarify key concepts, expanding on transition finance, making ESG data more transparent, developing a labelling scheme for sustainable financial products, and tackling ESG literacy gaps.

EBA Report

Its Progress Report focuses on the banking sector, with some focus on investment firms and more limited focus on payment service providers (PSPs) due to a lack of PSP-related feedback.

Pledges about future ESG performance are viewed as the most prone to greenwashing.

While greenwashing is increasing across all sectors, balanced against that is the increased public focus on climate accountability which means that companies are being held more accountable for their environmental policies, climate impact and disclosures.

In the banking sector, greenwashing is more prevalent at entity level than at product level (save in the case of investment products, where there is a greater sustainability offering and therefore a greater exposure to greenwashing risk).

Regarding impacts, based on feedback received to the call for input, greenwashing has the highest impact on reputational risk, followed by operational and strategic/business risks of banks and investment firms.

Greenwashing risk is seen as of low material risk to banks, but is expected to increase to medium (and possibly high) risk in the future.

The EBA hasn't put forward policy recommendations in its report, but will continue to work on this as it prepares its final report for publication in 2024.

EIOPA Report

EIOPA's report finds that greenwashing can appear, to varying degrees, as part of the broader set of conduct risks at all stages of the insurance lifecycle (entity level, product manufacturing, delivery and management) and the pensions lifecycle (scheme design, delivery and management) lifecycles. In addition to consumer detriment, EIOPA highlights the impact of greenwashing on providers (and the resulting risk of reputational and financial damage).

On the supervision side, EIOPA reported that only 10 national competent authorities (NCAs) believe they have sufficient resources and expertise to tackle greenwashing. 21 NCAs haven't identified instances of greenwashing in their jurisdictions due to a combination of resource constraints, low supply of products with sustainability features, and because the relevant sustainable finance requirements are new or not fully in force.

Concrete recommendations on how to address the issues highlighted in the report will be included in next year's final report.

It's a particularly busy time for the EU institutions (including the ESAs) from a sustainable finance perspective, with a sustainable finance package expected before the end of June (to include a proposal on ESG ratings), work on ESG disclosures for STS securitisations underway and the EU green bond standard close to being finalised:

Green Bonds: Update on EU Green Bond Standard Regulation (Arthur Cox)

ESG and Securitisation: ESG disclosures for certain STS securitisations (Arthur Cox)

Horizon Scanner: Finance (ESG Section) (Arthur Cox)

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.