ESMA and EC publish final report on Greenwashing

The European Securities and Markets Authority (ESMA) is addressing greenwashing risks to ensure investor protection and market integrity. The European Commission requested in 2022 three European Supervisory Authorities (ESAs) to prepare a report on greenwashing and the supervision of sustainable finance policies. In response to this request, ESMA published a report on June 4 that:

• Examines the role of supervision in mitigating greenwashing risks, based on a survey of national competent authorities and ESMA's ongoing supervisory activities.
• Suggests gradual improvement in key sectors of the sustainable investment value chain (SIVC), including issuers, asset managers, investment service providers and benchmark administrators.

Sustainability as a supervisory priority

Since 2019, ESMA has prioritized sustainability in its activities, including direct supervision, supervisory convergence, standards development and risk assessment.

• National Competent Authorities (NCAs) are prioritizing sustainability claims, critically reviewing documentation and exercising their professional judgment. They have a broad responsibility to protect investors and ensure the correct application of sustainability requirements. They have implemented risk-based oversight, focusing on the most significant risks. They can also apply their mandate to protect investors and existing provisions within the EU regulatory framework for sustainability oversight and enforcement.
• To address the need for expertise, NCAs and ESMA have started to develop sustainability-related skills and knowledge through training programs, contracts, cooperation with national agencies or dialogue with NGOs. Effective supervision depends on access to relevant, high quality and comparable data.
• The Report recommends improving human resources, adapting organizational structures for sustainability-related supervision, investing in data and SupTech (Supervisory Technology) tools, integrating greenwashing risks into risk monitoring and deepening critical thinking skills. ESMA is taking steps to promote supervisory convergence and support NCAs' ESG data disclosure efforts.
• The European Commission (EC) is urged to support supervision by prohibiting misleading information and maintaining supervisors' ESG benchmark standards. The use of automated processing of sustainability information and access to data through the European Single Access Point (ESAP) is also recommended. The strategy for retail investors requires ESMA to provide marketing communication guidance and strengthen supervisors' financial education mandates. Market participants in SIVC should make sustainable claims, communicate information clearly and consider areas of high risk.

Along with recommendations addressed to market participants, some of the actions to be considered by the NCAs, ESMA and the European Commission are:

• Investing in skills and expertise, technology systems to manage new information flows
• Implement periodic progress monitoring and reporting processes, where relevant.
• Integrate ESG risks into risk management systems and controls
• Adapt governance structures and processes to mitigate greenwashing risks (e.g. committees and guidelines)
• Assign due diligence responsibility for ESG data with the same level of ambition and care as for financial reporting.
• Where relevant, increase in resources for external verification
• Improve transparency of ESG data methodologies, and the use of estimates
• Contribute to addressing financial literacy and sustainability gaps among retail investors
• Take care in the use of language in advertising

Read the report