Our supervisors are busy in the ESG field, as demonstrated by our recent news updates:ESMA publishes final guidelines on minimum thresholds for ESG and Sustainability-related fund names, AFM SFDR survey results, MiFID/IDD survey results: Assist investors in finding sustainable investment opportunities.
On June 4th, 2024 new reports have been published: the ESAs call for enhanced supervision and improved market practice on sustainability-related claims
In their respective reports – yes ESMA, EBA and EIPOA reported separately (!) – the ESAs reiterate the 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. The ESAs stress again that financial market players have a responsibility to provide sustainability information that is fair, clear, and not misleading.
4 principles on greenwashing
Out of the respective reports you can distinguish 4 principles on how greenwashing is understood:
- Principle 1: Sustainability claims made should be accurate, precise, and should fairly represent their overall profile and business model, or the profile of their product(s)
- Principle 2: Sustainability claims should be substantiated and support their claims with clear reasoning, facts and processes.
- Principle 3: Sustainability claims and their substantiation should be accessible, clear and presented in a way that can be understood by the targeted stakeholders.
- Principle 4: Sustainability claims should be kept up to date, and any material change should be disclosed in a timely manner and with a clear rationale.
Based on these principles some examples of shortcomings identified by ESAs:
- Inconsistencies between marketing material and disclosures under SFDR
- lack of information on procedures and controls in place
- lack of information on binding elements of investment strategy and on data and data limitations
- inconsistency between marketing material and pre-contractual disclosures under SFDR,
- misleading practices regarding funds names, processes, and governance to ensure the integration of ESG factors into risk management.
Greenwashing examples
Some examples of greenwashing reported in relating to the SFDR are:
- Marketing a product as green/sustainable product on your website though the product itself does not have such features.
- Claiming that your investments will be done sustainably solely by looking at Article 8 of the SFDR? It is perceived misleading towards consumers as Article 8 SFDR does not provide any actual reliability of a degree of sustainability.
- Promoting your investment funds as green/ESG/sustainable on your website, while there is a lack of information about these funds and/or their manufacturer in accordance with relevant provisions of the SFDR
- Or the advertisement of a fund as having a measurable effect on CO2 avoidance and that investors would make a measurable ecological contribution by investing in the fund, without informing the client on how the calculation is carried out, and without presenting the calculation method in a sufficiently clear and comprehensible manner
The above shows that ESG keeps you and competent authorities busy. Not only your disclosures and marketing materials should be clear, fair and not-misleading, but you should also have an adequate governance, processes and controls in place to prevent greenwashing. Need help? We are happy to assist!
