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ESAs explain greenwashing in the financial sector

June 9, 2023

The European Supervisory Authorities (EBA, EIOPA, and ESMA) have released a Progress Report outlining a common understanding of greenwashing in the financial sector. Greenwashing can refer to intentionally or unintentionally offering misleading sustainability information and – unsurprisingly – the ESA’s report highlights lack of data as a cause.

In their coordinated efforts, National Competent Authorities (NCAs) and the ESAs aim to protect investors and maintain a trusted environment around sustainable finance. To help guide efforts to tackle greenwashing, the report provides some insights into high-risk areas – identifying the many aspects of a product or profile that can be misleading – including governance, sustainability strategy, targets, metrics, and impact.

The causes of greenwashing are multifaceted, but notably, they often stem from challenges faced by market participants in accessing high-quality sustainability data. The rapidly evolving sustainability regulatory framework has also presented implementation difficulties. More expertise in sustainability reporting and regulation is required to ensure that sustainability data is high quality – especially with significant legislation such as the CSRD shortly coming into effect.

To continue reducing the risk of greenwashing, it’s crucial that reporting firms communicate sustainability information in a balanced and accurate way. Enhancing the comprehensibility of sustainability disclosures for investors is important, which the report argues could be achieved through the establishment of a reliable and well-designed labelling scheme for financial products. Finally, as the regulatory framework for sustainability reporting matures, key concepts should be better clarified, encouraging effective reporting.

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