Painting pollution green with a highlighter

Greenwashing has a variety of causes, and combating it requires a commitment to improved disclosure, says the European Securities and Markets Authority (ESMA) in a new report.

Europe’s securities, banking, pension and insurance regulators all issued progress reports on their work involving greenwashing — when firms provide investors with misleading disclosure about the green credentials of various kinds of financial products.

“The findings show that misleading claims may relate to all key aspects of the sustainability profile of a product or an entity — from governance aspects to sustainability strategy, targets and metrics or claims about impact,” the regulators said.

“Cherry-picking, omission, ambiguity, empty claims (including exaggeration) [and] misleading use of ESG terminology such as naming and irrelevance are seen as most widespread misleading qualities,” ESMA said in its report.

That report concluded that greenwashing is generally the result of “multiple inter-related drivers,” including industry firms struggling to implement the governance processes and tools required to produce high-quality sustainability disclosures; challenges in accessing and producing “relevant, high-quality sustainability data”; and the fast-changing regulatory framework that has created implementation challenges for both firms and regulators.

To mitigate greenwashing risks, the firms involved in producing and selling sustainable financial products must “live up to their responsibility to make substantiated claims and communicate on sustainability in a balanced manner,” the report said.

“Comprehensibility of sustainability disclosures to retail investors needs to be improved, including by establishing a reliable and well-designed labelling scheme for financial products,” it noted.

Additionally, the regulatory framework needs to mature, and “key concepts need to be clarified and sustainability impact or engagement better integrated,” it concluded.

The regulators plan to issue final reports and possible reform recommendations in May 2024.