Drawing the battle lines in European greenwashing regulation

In response to the European Commission’s call for advice, the three European Supervisory Agencies (ESAs) - covering banking, securities, and insurance and pensions - published coordinated reports reflecting on the scope and effectiveness of the regulatory framework that applies to greenwashing. On the whole, the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA) caution against additional regulation, instead supporting more rigorous implementation and greater convergence of existing frameworks. 

Currently, rather than a bespoke regulatory regime, greenwashing practices are caught by a patchwork of sustainability-related frameworks (including the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR)) as well as the Market Abuse Regulation, the Unfair Commercial Practices Directive and other finance-specific frameworks. Implementation of these regulations is delegated to the relevant National Competent Authority (NCA) in each EU Member State.

The ESAs' key conclusions about tackling greenwashing

Reflecting on the current regulatory framework, the ESAs made a series of observations and recommendations as to where NCAs can improve their supervision of greenwashing practices. They concluded that there has been a noticeable uptick in supervisory activities, but that detection and formal enforcement is currently limited.  To address this, the ESAs outlined some barriers to progress, which were generally seen across the board. One barrier is resource and expertise constraints amongst NCAs, whose supervisory capabilities may also suffer from limited access to high-quality data.  Another perhaps more fundamental barrier is the complexity and imprecise interaction of the different regulatory regimes that govern greenwashing. 

1. Ways to enhance NCA supervision 

Investment in people and cooperation 

To remedy a perceived lack of resource amongst NCAs, the ESAs have advised that NCAs should invest in financial literacy programmes, recruit specialists and cooperate more with their peers, NGOs and ESAs. EIOPA suggested that NCAs establish a horizontal unit within their governance structures tasked specifically with high-level coordination of sustainability work, including greenwashing. The ESAs also signalled their own willingness to foster cooperation via joint training programmes and through sharing information on supervisory best practices. 

Data-handling

The collection and processing of the data required to detect greenwashing was cited as a particular resourcing challenge.  One reason for this is the absence of common methodologies (e.g. to calculate Scope 3 (indirect) GHG emissions or the carbon footprint attributable to a portfolio) and the need to use data from external providers where information is unavailable.  

To aid the data collection exercise, the ESAs highlight the benefits of ‘SupTech’ (supervisory technology) tools, which may include web-scraping and natural language processing functionalities.  A majority of NCAs report they are (or are considering) developing these tools, but few already have them in place, according to ESMA. 

Even with such tools, processing of data remains a challenge.  This may be alleviated by the standardised reporting framework being introduced via the new Corporate Sustainability Reporting Directive (CSRD) and associated European Sustainability Reporting Standards.  These will require around 50,000 companies active in the EU to publish standardised sustainability reports.  The CSRD is coming into force on a staggered basis, and from 1 January 2025, all large undertakings or undertakings that are parents of large groups will be required to produce such reports.  

Additionally, data accessibility is set to be widened via the forthcoming European Single Access Point (ESAP), which will provide a central conduit of information required for greenwashing detection, from 2027 onwards. In the meantime, ESMA notes that it is currently developing an indicator that will help assess the quality of sustainability-related claims disclosed by funds.

2.  The need for increased clarity, rather an expansion, of the greenwashing regulatory landscape

The three ESAs report a strong consensus that the current regulatory framework sufficiently captures greenwashing. It should be noted that the EBA did underline some small gaps in the framework, while ESMA recommended that the mandate of the Benchmark Regulation[1] be expanded to cover greenwashing. On the whole though, NCAs reported that the main challenge in navigating the regulatory regime is its ambiguity, rather than its coverage. The ESAs were particularly critical of some of the definitions across the regulatory framework (e.g. the unclear definition of “sustainable investment” in Article 2(17) of the SFDR). 

One report also emphasised that a majority of consumers do not understand common sustainability terminology and called on the European Commission to take a more “consumer-centric approach” when developing sustainability criteria. For their part, the ESAs propose producing guidelines to help market participants and NCAs navigate the complex regulatory landscape. With its final report, EIOPA has published guidance in the form of an “Opinion”, aimed to help NCAs monitor insurance and pension providers’ sustainability claims. 

Whether a new raft of greenwashing guidelines will appease EU Member States and industry bodies remains to be seen. Greater clarity around ambiguous elements of greenwashing legislation is likely to be welcomed if done well, but they might also be perceived as complicating the regulatory landscape further. With the slight shift to the far-right in the recent EU parliamentary elections, further action on greenwashing may be slightly slower than in recent times. 

[1] The Benchmark Regulation supports the sustainable allocation of capital and aims to promote transparency through disclosure requirements.