European Regulators Launch Study on Greenwashing

European Supervisory Authorities (ESAs) have issued a Call for Evidence (CfE) on greenwashing in order to collect information on greenwashing risks and practices in the banking, insurance, and financial markets sectors. The ESAs consist of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA) (ESMA).

The launch is in response to a request made by the European Commission earlier this year for information from the ESAs on a variety of factors connected to greenwashing and its associated dangers, as well as on the supervisory steps taken and obstacles faced to manage these risks.

The Commission's request highlighted the rapid growth in demand for and offerings of sustainable investment products, noting that while it views this growth as a "very positive trend," it also raised the risk of greenwashing, warning that such practices could undermine trust in sustainable finance and "the capacity of the financial system to channel private capital to sustainable investments."

The EU's Sustainable Finance Disclosure Regulation (SFDR) framework, as well as the U.S. Securities and Exchange Commission's (SEC) recent product label and disclosure proposals, Australia's recent anti-greenwashing guidance, and Singapore's Monetary Authority of Singapore's (MAS) new reporting and disclosure requirements for ESG funds, are examples of efforts to combat greenwashing risks.

In the past few months, regulators and authorities have taken a number of high-profile steps connected to greenwashing, including a greenwashing-related police raid at Deutsche Bank's investment arm DWS and an SEC probe into ESG-themed funds at Goldman Sachs.

The Commission's request emphasized the simultaneous need to monitor greenwashing, and it is evaluating the effectiveness of present supervisory mandates in tackling these concerns. In its solicitation, the EU Commission stated:

"Risks of greenwashing can develop in several segments of the financial sector, including those not covered by sustainability regulations and policies. The efficacy of sustainable finance policies in the EU hinges on a sufficient level of oversight and enforcement."

With their new call for evidence, the ESAs intend to collect information from stakeholders on how to understand greenwashing and what the main drivers of greenwashing may be, as well as examples of potential greenwashing practices in the EU financial sector, the scale of greenwashing, and the areas with high greenwashing risks.

The ESAs stated that the material acquired from its call for evidence will be used for its progress report to the EU Commission, which is expected in May 2023, followed by a final report a year later.

The ESAs stated in a statement announcing the commencement of the appeal for evidence:

"A more nuanced understanding of greenwashing will aid in policy formulation and oversight, as well as increase the credibility of sustainability-related claims."