EU Financial Markets Face Greenwashing Risks: ESMA

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by KnowESG
KnowESG_EU Financial Markets Face Greenwashing Risks: ESMA
Image courtesy of Caroline Martin

The European Securities and Markets Authority (ESMA) has introduced an all-encompassing report that sheds light on the growing issue of "greenwashing" within the financial sector as demand for ESG-related products continues to surge.

Demonstrating a clear commitment to enhancing transparency in the financial markets of the European Union, the European Securities and Markets Authority has offered valuable insights into the risks and consequences associated with greenwashing.

This initiative is particularly significant due to the rapid expansion of environmental, social, and governance-focused financial products and markets across the EU.

The report strongly underscores the necessity for a robust regulatory structure, precise representations of sustainability, and the difficulties encountered in integrating sustainability expertise and generating high-quality data.

Released this week, the 89-page report emphasises the occurrence of misleading sustainability claims, commonly referred to as greenwashing, which can arise either intentionally or inadvertently.

These claims can relate to entities and products falling within or outside the EU regulatory framework. The report reiterates the importance of clarity, addressing the challenges posed by deceptive sustainability claims that could sway investors and potentially mislead them.

Surge in Greenwashing

Esma highlights that greenwashing has emerged as a significant concern lately. With a limited pool of genuinely sustainable assets, especially those aligned with the stringent standards of the EU Taxonomy Regulation, there is a noticeable competitive urge among market participants. This drive compels entities to enhance their sustainability profiles, which may occasionally be misleading or not entirely accurate.

Regulatory Framework

The European Commission had previously stressed the significance of combatting greenwashing. In May 2022, it issued a "Request for input related to greenwashing risks and the supervision of sustainable finance policies" to the three European financial supervisory authorities.

This request aimed to clarify the definition of greenwashing, its manifestations in the financial sector, associated risks, enforcement of sustainable finance policies to counteract it, and suggestions for strengthening the regulatory framework.

At the heart of Esma's report lies the objective of deepening the comprehension of greenwashing, its potential negative impacts on EU financial markets and investors, and the assessment of vulnerable areas within the sustainable investment value chain.

Definition and Risk Evaluation

A notable insight from the report is the identification of three primary roles that market participants can assume in relation to greenwashing: initiator, propagator, or recipient of deceptive sustainability claims.

The report also highlights that such deceptive claims can encompass various crucial aspects of a product or entity's sustainability profile. These aspects encompass ESG governance and resources, ESG strategy, and sustainability impact, among others.

Additionally, the report dissects the risks associated with greenwashing across diverse sectors, shedding light on distinct challenges encountered by issuers, investment managers, benchmark producers, and investment service providers.

Remediation and Clarification

Esma has already taken steps to address these risks by coordinating supervisory efforts throughout the EU. The authority has identified "ESG disclosures" as a Union Strategic Supervisory Priority, underscoring a concerted drive toward ensuring consistent implementation of the sustainable finance framework.

Building upon the foundation of this progress report, a final report is anticipated in May 2024. This final report will encompass conclusive recommendations and potential enhancements to the EU regulatory framework.

For more regulatory news

To view and compare company ESG Ratings and Sustainability Reports across sectors, follow our Company ESG Profiles page.

Source: Delano

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