ESAs publish reports on greenwashing

On 4 June 2024, the European Supervisory Authorities (ESAs) jointly published three reports on greenwashing for the financial sector. These include the ESMA Final Report, the EBA Final Report and the EIOPA Final Report. The reports show that regulators are taking more concrete actions in supervising sustainability statements made by various financial institutions. In the report, the ESA’s offer an outlook on how supervision of sustainability can be gradually improved in the coming years.

This ESMA Final Report follows the Progress Report on Greenwashing published in May 2023. The Final Report supports a more risk-based approach to supervision in the context of greenwashing. Recommendations in the report include enhancing resources and expertise, and systematically embedding oversight of sustainability information within the organization. It also suggests investing in access to data and tools for technological oversight. Furthermore, the report states that oversight of sustainability claims has become a priority for National Competent Authorities. Together with ESMA, these authorities are taking actions to combat greenwashing risks, scrutinize sustainability claims critically, and ensure effective and consistent European supervision.

The EIOPA report focuses on misleading or unsubstantiated sustainability claims in the insurance and pensions sector. EIOPA noticed an increasing number of national regulatory authorities reporting on potential cases of greenwashing. Additionally, EIOPA provides several recommendations regarding sustainability claims on the basis of four principles: sustainability claims must be (i) accurate, precise, and fairly represented, (ii) substantiated, (iii) accessible to the intended readers and (iv) up to date. EIOPA also defines examples of both good and bad practices.

The EBA report focuses on the risk of greenwashing in the banking sector. The report includes recommendations for institutions, regulators and policymakers. According to EBA, greenwashing significantly impacts reputational and operational risks, leading to a growing risk of (ESG) litigation in recent years. EBA advises financial institutions to ensure that sustainability claims are accurate, substantiated, and understandable at both entity- and product level. National regulators should actively monitor the risks associated with greenwashing.

Joint Opinion ESAs on assessment SFDR

ESMA, EBA and EIOPA jointly published an opinion on 18 June 2024 regarding the assessment of the SFDR on their own initiative. The ESAs acknowledge that disclosures to investors under the SFDR may be complex by nature and difficult to understand, mainly for retail investors. The ESAs notice in practice that disclosures by financial market participants (under ‘Article 8’ or ‘Article 9’ SFDR) have been used as a labelling regime instead of a disclosure regime. To mitigate these risks, the ESAs propose a new product classification system to enhance transparency and understanding of sustainability features in financial products. Other topics discussed in the opinion include, inter alia, the introduction of a sustainability indicator simplifying complex information, uniform definition of ‘sustainable investment’ and the simplification of the relevant documentation. Finally, this opinion includes a series of technical changes that the European Commission could consider in its assessment of the SFDR.

The full opinion can be found here. For further insights on the Joint Opinion ESAs on assessment SFDR, we refer to our previous publication on this topic.

Green Claims Directive

On 17 June 2024 the European Commission adopted a proposal for the Green Claims Directive following the proposal for the Green Claims Directive by the European Commission of 22 March 2023. The directive addresses greenwashing and sets minimum requirements for the substantiation, communication verification of explicit environmental claims and environmental labels. For now, it seems that the directive will have (no to) limited application to the financial sector.

The Council's general approach will serve as the basis for negotiations with the European Parliament on the final version of the directive. These negotiations are expected to commence in the upcoming legislative cycle.

ESG Rating

On 24 April 2024, the European Parliament adopted the final text regarding a legislative resolution on the transparency and integrity of ESG rating activities. ESG ratings provide the market with a view on the exposure of a company or entity to environmental, social and/or governance factors and their impact on society. The aim of the proposed regulation is to improve the comparability, quality, reliability and transparency of these ESG ratings, enabling users, investors and rated entities to take more informed and substantiated decisions when it comes to ESG-related risks, impacts and opportunities. Briefly speaking, the regulation introduces an obligation on ESG rating providers operating in the EU to disclose their methodologies, data sources and any conflicts of interest to the users of ESG ratings. It is intended that ESMA will be responsible for authorisation (through equivalence, endorsement, or recognition) and ongoing supervision of providers.

Next steps?

Once adopted by the Council, the regulation will enter into force 20 days day following its publication in the Official Journal of the EU and be applicable 18 months after its entry into force.

ESMA guidelines on fund names using ESG or sustainability terms

The European Securities and Markets Authority published guidelines on funds’ names using ESG or sustainability-related terms on May 14th, 2024. These guidelines aim to prevent the misleading use of ESG-, sustainability-, transition- and impact related words in fund names. The misleading use of such terms entails a risk of greenwashing, which is particularly the case when funds referred to as green or socially sustainable do not meet the sustainability standards. In addition, the guidelines aim to further improve clarity about what investors may expect from ESG or sustainability-related terms. The guidelines will apply three months after the date of their publication on ESMA’s website and will immediately become applicable to funds launched after that date, whereas existing funds will benefit from a six-month transition period following the guidelines’ entry into force.

For further insights on the ESMA guidelines on fund names using ESG or sustainability terms please also refer to our previous publication on this topic.

ESMA Consultation Paper with Technical Standards on the European Green Bond Regulation (EUGB)

The EUGB provides for a framework for green bond issuance within the European Union and shall apply from 21 December 2024. On 26 March 2024, ESMA uploaded the first out of two consultation papers providing technical standards and guidelines specifying certain provisions of the EUGB. The aim is to invite stakeholders and market participants to submit their views, comments and opinions on the appropriate implementation of the EUGB.

The technical standards from ESMA will focus on senior management requirements and analytical resourcing, sound and prudent management, analytical knowledge, outsourcing of assessment activities and forms, templates and processes for registration. Once feedback is received, ESMA will consider this and submit the final report in Q4 and draft technical standards to the European Commission ultimately by 21 December 2024.

In addition, ICMA published guidance supporting the green, social, sustainability and sustainability-linked bond principles (Principles) on 25 June 2024 (see here). The guidance includes green enabling projects and sustainability-linked loan financing bonds (SLLB) and other specific aspects of the Principles. ICMA announced it expects to publish further guidance in the coming months.

EU Deforestation Regulation (EUDR)

On 29 June 2023, the EUDR entered into force. The objective of the EUDR is to ban products that are linked to deforestation and forest degradation in the EU market. The EUDR introduces due diligence obligations for operators and traders who place or make available, or export products that contain, have been fed with, or have been made using commodities at high risk of deforestation: rubber, wood, cattle, soy, palm oil, cocoa, and coffee. Such operators and traders must demonstrate that the products are not sourced from recently deforested land or involved in forest degradation by a due diligence statement that should be retained for five years and updated annually. As of 29 June 2023, operators and traders will have 18 months to implement the new rules.

EU Forced Labour Regulation (EUFLR)

The EUFLR is currently undergoing the approval process by the EU Council after the European Parliament agreed on the final draft of the EUFLR (found here) on 23 April 2024. The EUFLR prohibits the sale, import and export of products manufactured with forced labour on the EU market. The prohibition under the EUFLR extends to all types of products, including their components, and is universal, irrespective of the sector or origin or whether the products are placed on, or exported from the EU market. If this cannot be confirmed, the products are barred from entering the EU market or will be withdrawn if they are already in the market. In short, the enforcement of the EUFLR will be assigned to national competent authorities. Next step is the final approval by the EU Council, after which the EUFLR will be published in the Official Journal of the EU.

Would you like to gain more insight in the above topics of this ESG outlook or related topics? Please be referred to any of the team members listed below.