On June 1st 2023, the European Supervisory Authorities (ESAs) published their Progress Report on greenwashing in the financial sector. The report lays out the “common understanding of greenwashing” of ESAs, thus showing that any misleading sustainability statement or information could be considered as greenwashing. To avoid becoming “greenwashers”, financial institutions must notably adopt robust fossil fuel policies consistent with their climate pledges and avoid overselling the benefits of their products or services.
According to EU regulators, the risk of greenwashing has significantly increased in recent years. The EBA identified a worrying increase in misleading communications around ESG issues among EU banks. However, competent authorities – central banks, financial market authorities… – still do very little to address mounting greenwashing concerns, and report only a handful cases of alleged greenwashing.
In this context, the ESAs’ Progress Report – the basis for a “Final Report” due in May 2024, and scheduled to shape how supervisors tackle greenwashing – sends a clear signal to financial institutions to stop overusing the word “sustainable” and act on their climate commitments.
What is greenwashing?
The ESAs – European Banking Authority (EBA), European Supervisory Market Authority (ESMA) and European Insurance (EIOPA) – considers as greenwashing “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”.
The understanding of greenwashing given in the report covers a broad range of possibilities. ESAs especially note that greenwashing:
- Can be intentional or unintentional;
- Can result from the omission of information, the actual provision of information that is false or deceiving, or from misleading actions;
- Can happen at entity, product or service level;
- Can be related to entities inside or outside of the remit of EU regulatory frameworks;
- May or may not result in immediate damage to consumers and investors;
- May or may not result in a competitive gain or advantage.
The ESAs rightfully pushed back on industry demands to limit greenwashing to “intentional” cases and to the product level. Yielding to these demands would have rendered the supervisors basically powerless to address greenwashing. Indeed, it is very difficult to prove the intentionality behind the communication of misleading information or claims, as most greenwashing cases cannot be tied to the deliberate communication of false information. Furthermore, many sustainability claims and commitments made by financial institutions on their global impact are not sufficiently substantiated.The call for evidence provided the ESAs with many examples of greenwashing and played an important role in avoiding a narrow definition of greenwashing.
What does greenwashing look like?
National supervisors must take advantage of the sound definition put forward by ESAs to finally address greenwashing. At the same time, financial players must substantiate any sustainability claims they make and ensure they provide reliable information. All of them can rely on the EBA classification of greenwashing that we summarized and presented in the table below to better identify potential cases of greenwashing.
| Categories | Product level | Entity level |
|---|---|---|
| Misleading statements on the current sustainability characteristics | Misleading disclosures on EU taxonomy alignment (GAR)
Misleading product classification of financial products under article 8 and article 9 of the Sustainable Finance Disclosure Regulation (SFDR) Green/sustainable loans or financing not used to finance goods, products, activities which qualify as fully green or sustainable Misleading reference to green loans standards, bonds or labels False or inaccurate statement on the extent to which the service/product considers clients’ sustainability preferences Portraying a product/service as sustainable without providing any actual information about its sustainability Portraying an investment fund as sustainable while related considerations are not significant in the manager’s investment decision Advertising the sustainable/green components of a product/service without providing informatino about support for unsustainable activities (including fossil fuels) Misleading commitment to compensate carbon emissions by purchasing carbon offsets |
Misleading/inaccurate disclosures under Corporate Sustainable Reporting Directive (CSRD) or Taxonomy Regulation Article 8
Misleading statements on the integration of ESG in the strategy and/or governance Selectively promoting green initiatives and intentionally hiding information about financing of companies involved in non-sustainable activities Misleading references to earned ESG certifications by the entity Lobbying against pro-climate/environmental measures while presenting itself as green |
| Misleading statements on the sustainability results and/ or ‘real world’ impact | Unsubstantiated claims on the impact of a product/service (for example impact on avoided emissions / no information on how the positive contribution is measured…)
Sustainability linked loans/bonds presented as having real world impact while their structure does not necessarily allow it and/or there are no substantial incentives Incorrect statements on product results under article 11 of the SFDR |
Misleading/inaccurate disclosures under CSRD or Taxonomy Regulation Article 8
Unsupported marketing claims by the entity stating that its activities are having ‘real world impact’ without evidence of a causal link in the real economy Unqualified claims regarding the environmental benefit of the entity’s activities despite continuing to finance companies that allegedly generate significant greenhouse gas emissions. Misleading statements on the environmental strategy or policy that suggest all activities are covered while only some financial services fall under the scope of the strategy/policy Drawing attention to a minor positive action that has little impact on overall environmental footprint |
| Misleading statements on future sustainability commitment. | Commitment to reduce portfolio emissions or emissions from a specific asset class without a credible transition plan
Misleading claims on how the proceeds from sustainable/green bonds/loans feed into the transition of the entity |
Misleading/inaccurate disclosures under CSRD
Institutions making public commitments to de-carbonise their overall activities (Scope 3) and/or reach net zero emissions but transition plan at entity level is not credible nor evidenced Incorrect claims as to the extent to which activities of the entity are aligned with a climate target Vague and/or unsubstantiated statements that future products will be designed to protect the environment Signing up to collaborative engagement initiatives that lack sufficient ambition to reach their ESG objectives or are not reflected in the business strategy or action plan Institutions making public commitments to reduce Scope 1 and Scope 2 emissions, but transition plan is not translated into an internal control framework |
Source: Reclaim Finance, adapted from EBA
As shown in the table above, the EBA notably identified that banks cannot communicate about their “green” activities while omitting their support to polluting ones, and especially fossil fuels. HSBC was sanctioned by UK regulators in 2022 for doing so. Reclaim Finance’s Oil and Gas Policy Tracker – mentioned in the EBA report – provides a tool to assess such cases of greenwashing and build robust sectoral policies that avoid it.
The ESAs report should be a wake-up call for national supervisors and financial institutions. The lack of a clear definition for greenwashing has long enabled financial players to communicate misleadingly on their contribution to environmental and human rights protection and the fight against climate change. This no longer holds, and if they are to avoid a massive backlash, financial institutions must turn their “green” commitments and promises to action and ensure they communicate proportionately on the impact of their services and products. For any financial institution that is committed to acting on climate, this notably requires truthfully disclosing their support to harmful activities and, more specifically, immediately ending their support to fossil fuel development.
