Greenwashing and isolated green warning sign against white background stock illustration

European financial regulators are calling for reforms to sustainable finance disclosure rules.

In a joint paper, the three European regulatory agencies — the European Banking Authority, the European Insurance and Occupational Pension Authority, and the European Securities Markets Authority — called for improvements to the disclosure regime in an effort to boost investor protection and facilitate the transition to a greener economy.

The regulators said consumer testing exercises show the disclosures required under the current regime are complex and can be difficult to understand, particularly for retail investors.

The existing requirements were intended to enhance transparency around sustainability. In practice, financial firms have used them as a marketing tool, the regulators said, raising “greenwashing and mis-selling risks.”

To address these issues, the regulators seek to introduce simple categories for financial products — namely “sustainable” and “transition” categories — to make it easier for retail investors to understand the purpose of the products.

“The rules for the categories should have a clear objective and criteria to reduce greenwashing risks,” they said.

Among other things, the regulators also proposed that the European Commission consider introducing a sustainability indicator for financial products such as investment funds, life insurance and pension products.

The regulators “strongly encourage” European policymakers to undertake consumer testing when developing policy reforms in this area.

“[E]mpowering retail investors to better understand how the underlying sustainability profile of financial products ultimately serves the purpose of facilitating capital allocation to sustainable investment,” the paper said.