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The European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority are agreed on greenwashing.

Together, the three European Supervisory Authorities have released a unified definition of greenwashing. And it is to apply to market participants across their respective remits – financial markets, banking, and insurance and pensions.

ESAs common high-level understanding of greenwashing

The ESAs understand 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 financial services. This practice may be misleading to consumers, investors, or other market participants.

The ESAs also highlight that sustainability-related misleading claims can occur and spread. This can be either intentional or unintentional. And they can relate to entities and products that either under or outside the remit of the EU regulatory framework.

The National Competent Authorities (NCAs) and the ESAs are, therefore, working to meet expectations from stakeholders. That is to ensure consumer and investor protection and market integrity and maintain a trusted environment for sustainable finance. Given the integrated nature of the financial system, the ESAs will be working in a coordinated manner to address greenwashing.

Highlights from EBA progress report

The EBA progress Report overviews greenwashing in the banking sector, its impact on banks, investment firms and payment service providers.

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The outcome of the quantitative analysis of the greenwashing phenomenon shows a clear increase in the total number of potential cases of greenwashing across all sectors, including for EU banks. It also indicates rising climate accountability. Increased public attention to climate change has means companies are held more accountable for their environmental policies, climate impact and disclosures.

Pledges about future ESG performance are considered to be the most prone to greenwashing. This is followed by ESG strategy and objectives of entities, as well as ESG labels and certificates.

Both competent authorities and market participants estimate that greenwashing has the highest impact on reputational and operational (litigation) risks. The materiality of greenwashing is currently perceived as low or medium for banks, and medium or high for investment firms. It is however expected to increase in the future.

Finally, the EBA finds that several elements in the current or planned regulation and supervision may contribute to tackling greenwashing. These include the rules that prohibit unfair communication and marketing, several pieces of the EU sustainable finance framework. Examples include the EU taxonomy and ESG disclosures, and a set of provisions in EBA Guidelines.

There are, however, challenges to ensure these tools are properly implemented to address greenwashing, such as adequate data and methodologies. In addition, the EBA notes that the sustainable finance regulatory framework is not yet fully developed or is still at an early stage of implementation. This suggests that benefits of some rules are not fully visible yet.

Next steps

Responses to the Call for Evidence on greenwashing will be published on the ESAs websites in the following weeks.

The Final Reports will be published in May 2024. This will consider final recommendations, including on possible changes to the EU regulatory framework.

Steve Round, co-founder at SaaScada told RBI: “In the absence of regulation, we’ve long-lacked clear guidelines on how to measure the sustainability of investments and financial products. This makes it easier for greenwashing to slip under the radar. But with EU regulators cracking down on sustainability misrepresentation, FS firms will be forced to keep up. Those that fail to do so could risk costly fines and reputational damage in the future.

“FS firms must make it a priority to build the foundations needed for comprehensive reporting of the environmental and social impact of their operations. But many struggle to gain a picture into their impact. This is due to a lack of reliable and accurate data for ESG reporting. The best way the sector can tackle this problem is by defining clear metrics and data categories that should be logged in ESG reporting and adopting the tools to gather this data effectively. Only then can firms address greenwashing and build sustainability into business models.”