ESMA, the EBA and EIOPA published their final reports on greenwashing in the financial sector today, following last year’s interim reports (see here).  They reiterated their common high-level understanding of greenwashing as:

“…a practice whereby 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.”

Key takeaways:

• Clear increase in total number of potential greenwashing cases across all sectors from 2012 to 2023. Total number of alleged cases increased by 21.1% in all regions and by 26.1% in the EU when compared to 2022.  Slight (6.8%) decline in the number of alleged cases in North America, which the EBA noted “can possibly be explained with the backlash in ESG matters and thus less reporting.”
• Greenwashing controversies remain amplified towards EU financial and banking institutions.
• Environmental (landscape, ecosystem, biodiversity and climate) and social (impact on communities, employment conditions and local participation) related issues are the most prominent subjects of alleged greenwashing (37% and 33% respectively ). Alleged governance-related greenwashing cases also increased (but remained small in number).
• 6 key economic sectors see the greatest concentration of greenwashing allegations: oil, gas and utilities, mining, industrial construction, food and beverage, household goods and the financial sector. The financial sector accounted for c16% of alleged greenwashing cases worldwide in 2023.
• Reputational and operational risks are regarded as the financial risks most impacted by greenwashing (mirrored by the growing trend in greenwashing-related litigation). The EU financial sector saw a 13.6% annual increase in alleged greenwashing cases in 2023 – the three most common topics were climate change, impact on landscape and biodiversity, and impact on local communities.
• Greenwashing (as a type of miscommunication / misconduct) can be captured by existing EU rules prohibiting misleading information, and by acting on breaches of recently-introduced specific sustainability-related requirements in EU law.
• NCAs reporting detecting only a small number of actual or potential occurrences of greenwashing (this could be due to multiple factors). Formal enforcement decisions have also been limited – most issues have been addressed as part of overall supervisory relationships.  However, most NCAs reported having insufficient resources, and almost unanimously identified access to data as a challenge in at least one sustainable investment value chain sector.  Most are looking at using SupTech tools in the future to increase efficiency.

While the three reports (EBA, ESMA, EIOPA) set out steps the financial sector, the ESAs and NCAs should take to better address greenwashing, the ESAs haven’t suggested wide-ranging legislative change.  The EBA wants the focus to be on finalising and implementing existing initiatives, but did observe that “…developments on aspects that are relatively less regulated (transition finance, green- and sustainability-linked loans) or where specific issues have been identified (review of the [SFDR]) would contribute to the robustness of the regulatory framework”.  ESMA wants to see swift adoption of the SFDR Level 2-related changes to improve access to machine-readable SFDR disclosures (but several industry associations have lobbied against swift adoption until the Level 1 review is completed).  ESMA is concerned that the planned changes to the EU Benchmarks Regulation will take all EU ESG benchmarks out of scope as each would be treated as a non-significant benchmark.  In its report, EIOPA suggests amending existing laws to clarify what non-life insurance products with sustainability features are and the adoption of a more consumer-centric approach in the Insurance Distribution Directive.  It plans to publish an SFDR-related opinion shortly which may suggest further changes.  Our Insurance Group will publish its insights in the coming days.