ESMA Tackles Greenwashing with New Tool
The EU watchdog plans to ramp up scrutiny of sustainable financial products, warning providers not to make “unsubstantiated” claims.
The European Securities and Markets Authority (ESMA) has developed a new tool that will enable it to better identify cases of greenwashing in the investment management industry.
In a new report, the watchdog said it had recently increased its analytical efforts to detect mismatches between green claims and actual investment strategies, deploying a combination of natural language processing and web scraping. On the basis of that work, it has now developed what it describes as an “indicator” to qualify greenwashing risk among investment funds.
“[We are] exploring different ways of quantifying [greenwashing] risk, including by looking at the consistency of sustainability-related claims across fund documents, unsubstantiated use of vague ESG-related language by fund managers, and alignment between a fund name and its portfolio composition,” ESMA said in a statement.
The regulator said it would also look for potential misalignment between funds’ disclosures and their actual investments.
The announcement came as part of ESMA’s final report on greenwashing, produced in response to a request from the European Commission for input on greenwashing risks and the supervision of sustainable finance policies. The commission has also asked for input from the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA).
Do not mislead
Upon launching the report, ESMA Chair Verena Ross said the regulators aimed to promote EU-level common supervisory actions across the sustainable investment value chain, and would continue to foster “convergent and effective supervision”.
“I would also like to remind all market players of their responsibility to avoid making unsubstantiated sustainability claims and to communicate any sustainability-related information in a manner that is fair, clear and not misleading,” Ross added.
In its own report, also released last week, the EIOPA laid out four principles that pension funds and insurance companies should follow when making sustainability claims.
It said that claims should be accurate, precise, and fairly represent the provider’s and product’s profile; that they should be substantiated with clear reasoning, facts and processes – which should all be accessible by the targeted stakeholders; and that they should be kept up-to-date, with any material changes disclosed in a timely manner and with a clear rationale.
As highlighted by international law firm Linklaters, ESMA’s report won’t be the regulator’s “last word” on greenwashing.
“ESMA notes that its response to the fourth component of the [commission’s] request on regulatory improvements will be completed via a separate opinion…building on preliminary regulatory remediation actions identified in the progress report,” it said in a statement.
‘Greenhushing’
Greenwashing has been an increasing focus for regulators globally, with concerns around climate change sending demand for ESG funds soaring.
In the UK, the Financial Conduct Authority was an early mover against greenwashing, issuing new labelling, naming and marketing rules for asset managers and portfolio managers. Regulators in the US, Australia and Canada have also made moves to tackle greenwashing.
But the growing risk of regulatory censure, combined with a lack clarity on what counts as ‘greenwashing’, has prompted a retreat from ESG claims in some markets.
“Many funds are now ‘undeclaring’ their green credentials because they are worried that they will be accused of greenwashing,” said Jurei Yada, Programme Leader for EU Sustainable Finance at climate think tank E3G. “So greenwashing gives way to greenhushing. This was not the intention of a tighter regulatory regime, and highlights the need for much clearer guidance.”
The work of ESAs has been complementing EU efforts to stamp out greenwashing on consumer products, including through an amendment to the Consumer Rights Directive, as well as through the as-yet unlegislated Green Claims Directive – which would introduce a verification process for companies making green claims.
The directive was approved by the European Parliament in March, but is yet to be passed by the Council of the EU. The Financial Times reported last week that some EU governments were trying to water it down, citing documents outlining proposed changes.
The post ESMA Tackles Greenwashing with New Tool appeared first on ESG Investor.