Sector · Laws and Regulations

Greenwashing goes unpunished in Europe

EU flag at the European Parliament in Strasbourg. Photo: EP.

Unlike in the United States and Australia, greenwashing in Europe’s financial sector remains largely unpunished, even though existing legislation allows national regulators to take action against firms that mislead investors. Most supervisors in the EU lack resources to act, according to a new European supervisory report. 

On Tuesday, Europe’s top regulatory bodies overseeing investment firms, banks, and insurers stated that financial supervisors in EU member states instead prefer to collaborate with the industry, guiding market players through the implementation of a new, complex regulatory framework governing ESG and sustainable investments.

In its ’Final Report on Greenwashing’, the European Securities and Markets Authority, Esma, said formal enforcement decisions “are, up to now, limited” as national supervisors, such as CSSF in Luxembourg and AFM in the Netherlands, address such irregularities “mostly in their ongoing supervision,” offering feedback during their regulatory dialogue with firms.

‘Gradual approach’

National supervisors ”have generally favoured a gradual approach, accompanying market players in the implementation of a new, complex regulatory framework,” Esma said, adding that regulators also find it hard to establish infringements under a regulatory framework that “builds on unclear or ambiguous definitions”.

The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (Eiopa) also issued reports on greenwashing in their respective sectors on Tuesday. EBA reported that the number of alleged greenwashing cases in the EU rose by 26% in 2023 compared to 2022, driven by increased communications on products linked to sustainability. The EBA added that external checks of these instances could help banks and other institutions with compliance.

Deceptive practices

Greenwashing generally is defined as a deceptive practice where a company exaggerates or falsely claims its products or services as environmentally friendly. This is often done to attract environmentally conscious consumers, investors, or regulatory favour without making substantial efforts to reduce environmental impact. Essentially, it involves misleading marketing or communication strategies that create a false impression of sustainability.

The EU however still lacks a clear legal definition of greenwashing. The industry has repeatedly called for a clearer definition, a point the EU is due to address when it updates its sustainable finance framework. However, European supervisors already are empowered, like their counterparts in the US and Australia, to crack down on misleading information firms use when marketing these products.

That misleading information rule stems from the EU’s Markets in Financial Instruments Directive, known as Mifid. The U.S. Securities and Exchange Commission in September used a similar rule to impose a 19 million dollar fine on German asset manager DWS, Europe’s number three, for false marketing claims of some of its investment funds.

Australia’s national supervisor Asic last summer issued an infringement notice of 140,000 Australian dollars against US fund manager Vanguard in relation to “false and misleading” claims relating to ESG exclusions.

Not a single EU case submitted

In the EU, however, no greenwashing cases were submitted to law enforcement authorities, Esma reported. Its final report on greenwashing takes stock of feedback it has received from the 27 national market supervisors that are part of the European supervisory network, known as National Competent Authorities, or NCAs. Esma refrained from naming countries and firms. 

Only one single NCA in the identified actual greenwashing cases, while 13 reported occurrences of potential greenwashing. In four countries, an unclear definition of “sustainable investment”, as engrained in the Sustainable Finance Disclosure Regulation, or SFDR, was reported as “a challenge” for identifying greenwashing. 

In nine countries, NCAs asked investment managers to change their sustainability related information, including fund names, methodologies and investment processes. One NCA asked two fund managers to ”take immediate measures” and change information on related websites. Two NCAs issued orders to investment firms.

Resources ‘not sufficient’

The authority said that supervisors are building “sustainability-related capacities and expertise” through training programs, recruitments, cooperation with relevant national agencies or dialogue with non-governmental organisations. “Most NCAs consider, however, that their resources are not sufficient,” it said.

Across the EU, national supervisors have allocated approximately 92 FTEs to sustainability matters, or an average of 3.2 per regulator. This ranges from 35 FTEs at one single NCA to 0.25 FTE at three supervisors. 

Esma’s report also highlights major disparities among national regulators when it comes to challenging access to ESG data. Ten NCA said there is sufficient ESG data available, while 17 indicated difficulties. “Importantly, divergent views on data needs by NCAs seemingly reflects different supervisory practices,“ Esma said.

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