Much to Learn for EU Regulators on Greenwashing

Progress reports published by the EU watchdogs highlighted shortfalls in resources and understanding, as well as gaps in existing sustainable finance regulation.  

The European supervisory authorities (ESAs) and EU national competent authorities (NCAs) will need to build out their in-house resources and skill sets to effectively identify and handle instances of greenwashing by financial institutions, but greater guidance is recommended by observers rather than new waves of regulation.  

Earlier this month, the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and European Securities and Markets Authority (ESMA), published reports outlining their current progress on investigating greenwashing across financial markets, within which they warned regulators are currently under-resourced and underequipped to sufficiently address greenwashing.  

The ESAs said this is compounded by gaps in existing sustainable finance legislation.  

“To understand and challenge sustainability-related claims, regulators need to develop new expertise and skills and to absorb a wide range of new obligations stemming from a regulatory framework that is not yet established,” the ESMA report said, noting that the sustainability profiles of entities are complex, building on mandatory and voluntary disclosures covering backward- and forward-looking data across longer-term horizons than financial information typically covers.  

EIOPA added that only ten European NCAs covering insurers and pension schemes said they have the sufficient resources and expertise to tackle greenwashing, with 17 claiming they do not. At the time of speaking to EIOPA, 21 NCAs had not identified occurrences of greenwashing “due to resourcing constraints, low supply of products with sustainability features, and because the relevant sustainable finance requirements are new or not fully in force”. 

It’s vital that the ESAs and NCAs “get to grips” with the detail around sustainability metrics and data, Will Oulton, Chairman of the European Sustainable Investment Forum (Eurosif), told ESG Investor.  

“We currently have a cohort of regulators that are still relatively new to this topic and need to learn quickly about what the information they are being presented with actually means,” said Oulton, also Responsible Investment Advisor at First Sentier Investors.  

Commenting on the EBA paper, Kim Rybarczyk, Corporate Counsel at law firm Linklaters, added that the banking watchdog “didn’t appear to suggest a solution […] but perhaps the solution will be focused on once the regulatory landscape settles down”.  

Europe is currently in the process of implementing, extending and refining the pillars of its sustainable investment legislative framework, which includes the sustainable finance taxonomy and the Corporate Sustainability Reporting Directive (CSRD). This week, the European Commission published a new package of measures

Elizabeth Lance, Assistant Chief Counsel at the Investment Company Institute (ICI) Global, an association representing regulated investment funds, countered that ESMA and the other ESAs “already have the supervisory tools that they need to address concerns about misleading statements”. 

“Investor education and promoting investor tools is an area the ESAs could certainly explore further,” she added.  

According to the Joint Committee of the ESAs 2023 Work Programme, their work on financial education will seek to incorporate ESG dimensions.  

Capacity and resourcing pressures are also an issue for entities falling under sustainable finance legislation, which heightens the risk of ‘business as usual’ cultures and inadequate incentive structures becoming entrenched, the ESAs said. 

“The ESAs should be looking to describe the conduct or circumstances that they believe to be greenwashing, which would be a better way of assessing the extent to which existing EU national provisions and regulatory frameworks could be used to address the issue,” said Lance. 

What is the conduct or circumstances the ESAs are seeing that is very concerning? Not anecdotally, but in specific terms. Are there existing regulatory tools to address it?” 

The ESAs first published a Call for Evidence on greenwashing in November, following a mandate issued last year by the European Commission to explore whether further supervisory or enforceable action is needed to reduce greenwashing risk in the sustainable investment space. 


To prevent capacity overload, experts speaking to ESG Investor urged regulators and policymakers to focus on amendments to existing sustainable finance legislation rather than introducing new regulation. 

Greenwashing is a challenge no question, but that doesn’t necessarily mean more regulation is needed,” said Rybarczyk from Linklaters.  

“The extent to which gaps can be identified and plugged [using the existing regulatory framework regulation] would be helpful.” 

In the EIOPA paper, only three out of 21 NCAs identified the “inadequacy of the current sustainable finance framework at tackling greenwashing”, with one NCA noting that a lack of clear requirements meant they were unable to classify shortcomings in entity-level disclosures as greenwashing.  

Eurosif’s Oulton said that continued efforts to provide clarity on a extensive piece of regulation like the Sustainable Finance Disclosure Regulation (SFDR) is “critical”.  

SFDR was first introduced as a reporting framework in March 2021 to ensure asset managers with EU-domiciled ESG or sustainability-labelled funds provided a minimum level of transparency to justify their funds as Article 8 (environment and/or social characteristic) or 9 (environmental and/or social objective). Level 2, which went live at the beginning of this year, has prompted increased caution as managers grapple with the complexity.  

In particular, the ESMA paper acknowledged there is continued “widespread concern about the lack of clarity of the SFDR definition of ‘sustainable investment’”. 

In April, the European Commission said it would not define ‘sustainable investment’, instead leaving managers and service providers with the responsibility of providing transparency about their interpretations.  

“There’s a lot of learning to come following the last few months of managers’ implementation of SFDR [Level 2], which should give the ESAs a rich source of information to review and consider whether the regulation is moving in the right direction or if more clarity is needed,” said Oulton. 

The Commission is also expected to carry out a review of SFDR later this year. 

The ESAs noted other inconsistencies across the existing regulatory framework that may contribute to greenwashing, including a lack of standardised calculation of metrics, minimum standards that fall short of supporting high ambition, and an absence of regulation for widely used concepts like ‘impact investment’. 

In February, ESMA introduced a separate proposal for fund-labelling rules to tackle greenwashing, which would require any EU-domiciled fund with an ESG-related or impact-related label must meet an 80% sustainable investment threshold.

“It’s important that the ESAs take the time between now and the final progress reports to continue to survey the market in light of the regulatory toolkit they already have and consider whether there are existing rules which can mitigate greenwashing,” said Victoria Hickman, Financial Regulation Counsel at Linklaters.  

“Supplementing these with guidance rather than new rules could be an effective approach,” she added. 

Common ground 

Experts speaking to ESG Investor were largely supportive of the ESAs agreed overarching definition of greenwashing.  

They defined 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.” 

Hickman welcomed the ESAs’ attempt, highlighting the difficulty of generating a definition that is certain enough to build trust in the sustainable product market and provide clarity as to whether something is greenwashing, while avoiding being “so prescriptive that the market cannot evolve”. 

Lance from ICI Global questioned the need for the definition, arguing that its ultimate message that sustainability claims should be clear, fair and not misleading “is already the backbone of investor protection in the EU, and already applies to sustainability claims”.   

The ESAs final progress reports will be published in May 2024.  

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