EU Regulators Urge Action Against Greenwashing Risks

EU Regulators Urge Action Against Greenwashing Risks

Increased supervisory actions and better access to data and other resources will be required to address growing greenwashing risks across banks, investment firms and insurance companies, according to reports recently published by the European Supervisory Authorities (ESAs).

The publications are the Final Reports on Greenwashing released by the ESAs, following a request in 2022 by the European Commission for input from the ESAs on greenwashing and its related risks in the financial sector, and on the supervisory actions taken and challenges faced to address those risks. The Commission’s request highlighted the rapid growth in demand for and offerings of sustainable investment products and noted that, while it views this growth as a very positive trend, it also raised the risk of greenwashing. The Commission warned that such practices could undermine trust in sustainable finance and the capacity of the financial system as a whole to channel private capital to sustainable investments.

The ESAs issued a call for evidence on greenwashing following the Commission’s request. Initial reports were issued last year with the aim of forming a common understanding of greenwashing while identifying key sources of greenwashing risk in the respective sectors to support market participants and regulators, including the National Competent Authorities (NCAs), in addressing these risks. The ESAs also established a working definition of greenwashing, this 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.

Significant increase in greenwashing incidents
In the recently published reports, which provide an update on the current supervisory responses to greenwashing risks, the ESAs noted increased steps already underway by the NCAs to supervise sustainability-related claims. However, the ESAs also highlighted a need for enhanced supervision going forward and called for regulators to be given increased tools and responsibilities to address greenwashing. Both the EBA and EIOPA noted a significant increase in greenwashing incidents in their respective sectors, with the EBA reporting 26% growth in the total number of alleged cases in the EU in 2023 compared to the prior year, and EIOPA reporting that five member states’ national supervisors have reported instances of greenwashing in 2024, compared to only three in the previous year.

ESMA noted that, while regulators are stepping up action on greenwashing, the NCAs are facing constraints on their resources, as well as on their access to expertise and to good quality data. Priority actions recommended by ESMA included increasing human resources, expertise, and supervisory tools at NCAs, as well as further embedding greenwashing risks in their respective supervisory work programmes. ESMA also called on the EU Commission to reinforce NCAs’ and ESMA’s mandates in certain areas, and to ensure a legislative framework supporting NCAs’ access to data.

Addressing challenges related to data
Similarly, the EBA also called for efforts aimed at addressing challenges related to data, in addition to usability, consistency, and international interoperability of regulations. The EBA also made recommendations for banks to take measures at the entity and product level to ensure the accuracy and clarity of sustainability claims. Additionally, the EBA recommended that priority is given to finalizing existing and planned legislative and regulatory initiatives in the near-term, and to support a robust implementation of the full set of new regulations.

EIOPA’s report included a series of principles for supervisors to consider when evaluating sustainability claims, including ensuring that the claims are accurate, precise and fairly represent the provider’s and product’s profile, and that the claims can be substantiated, up-to-date, and accessible to targeted stakeholders. EIOPA also set out a series of recommendations to address challenges in the supervision of greenwashing such as resource constraints, a lack of sustainability-related data, complex regulatory frameworks and a lack of common approach to greenwashing supervision.

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