Common understanding of greenwashing
The Final Report sets out the ESAs' common high-level understanding of greenwashing: "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".
Greenwashing can be intentional or unintentional and take place at any stage in the relationship, business cycle or value chain. It can also take place at entity level, financial product level or at the level of the financial service being provided.
The Final Report also sets out some ways in which the ESAs consider that misleading behaviour can occur. These include as a result of the omission of relevant information or the provision of false information. Actions can also be misleading, such as wealth managers or advisors identifying clients who have indicated sustainability preferences as falling within the positive target market of a product with no sustainability features.
Supervision of greenwashing risk by NCAs
Current position
Sustainability disclosures are currently a Union Supervisory Strategic Priority and this is expected to remain the case. However, to date, relatively few greenwashing cases have been detected by NCAs with little enforcement action. This mainly appears to be because NCAs have generally preferred to take a more collaborative and preventative approach including through guidance to firms and scrutiny of investor documentation at the authorisation stage. NCAs also consider that their efforts are currently hampered by a lack of access to quality data.
Future approach
ESMA takes the view that while financial market participants ultimately bear the responsibility for the reliability and accuracy of their sustainability disclosures, NCAs have a responsibility to ascertain that sustainability-related disclosures are in line with the requirements in sustainability legislation.
Areas of likely future focus flagged in the Final Report include:
- Claims about product level sustainability, real-world impact or engagement activities
- Entity-level net zero targets and transition plans
- Sustainability-based remuneration systems
ESMA recommends that NCAs critically scrutinise documentation and challenge fund disclosures where appropriate. NCAs should base this assessment on the ESMA Supervisory Briefing on Sustainability Disclosures. ESMA also suggests that NCAs seek data on portfolio composition from firms when considering a specific disclosure.
Firms can therefore expect more questioning on the sustainability claims that they make in their investor documentation and may need to provide information to NCAs to show that they are supportable in practice. Firms are also likely to be asked to make changes to their documentation and disclosures if NCAs do not consider that the claims made in them are supported by the evidence.
ESMA also encourages NCAs to use technology and other tools in the supervision of greenwashing risk. These are expected to assist with supervision but also help address the concerns around access to data. For example, ESMA has been collecting information to build language-based indicators on sustainability-related terms. Although NCAs are expected to use their "professional judgment" when reviewing sustainability-related disclosures, it seems likely that there will ultimately be a certain amount of standardisation in their approach to the language used by firms.
If you would like further information or assistance in understanding the Final Report, please speak to your usual Travers Smith contact or any of the individuals below.
