The document titled "Progress Report on Greenwashing" from the European Securities and Markets Authority (ESMA) provides an in-depth analysis of greenwashing in the financial sector. It is due to be published in May 2024.
Here are the key takeaways:
- Definition of Greenwashing: The report defines greenwashing as 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 a financial service. This practice may mislead consumers, investors, or other market participants. This includes faking impact or misallocating the impact factored or achieved to part of portfolio, omitting information, and misleading actions such as cherry picking.
- Greenwashing Risks: The report identifies greenwashing risks across the sustainable investment value chain (SIVC). The dimensions to consider when identifying risks: roles (trigger, spreader or receiver), topics, how claims can be misleading to investors and channels of communication.
- Areas Exposed to Greenwashing: The report identifies areas more exposed to greenwashing risks and suggests potential remediation actions. These areas include issuers, investment managers, benchmark administrators, and investment service providers. High-risk areas for investment service provider include ESG Strategy, Impact & Performance an exaggerated claims by benchmark administrators. Channels used are regulatory documents, ESG ratings, labels and marketing material.
- Remediation Actions: These include making the regulatory framework more robust against greenwashing risks, upgrading firms’ governance, processes, skills, IT systems, establishing reliable, comprehensive sustainability data, and supporting comprehensibility for retail investors. They focus on the work SFDR and TR need to do to improve guidance & the absence of an EU golden standard for impact measurement. This also involves a combination of technology /embedded controls, third party independent verification and due diligence responsibilities streaming and more robust data.
- Monitoring and Supervision of Greenwashing: The tools to monitor have not been fully pinned. To start, they will focus on quantitative indicators, consumer complaints, NLP techniques to screen text. But first, they need a Single Access Point for submissions, a common language to treat complaints and a regulatory template or NLP algorithm that can make sense of the submitted information.
- Future Work: The report mentions that a final report will be published in May 2024, providing a stocktake of supervisory powers, resources, and actions to address greenwashing risks. It will also consider final recommendations, including on possible changes to the EU regulatory framework.
- You can access the full report here for more detailed information.
