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February 22, 2022

Finding a universal definition of greenwashing

As the number of sustainable investment products grows, the European Securities and Markets Authority seeks to define the term ‘greenwashing’

Last week, the European Securities and Markets Authority published its sustainable finance roadmap for 2022-2024, which sets out its priority areas and actions for the next three years. Many in the industry have welcomed the regulator’s move, which would harmonise the interpretation of rules across the EU and reduce the risk of regulatory arbitrage. The implementation of Esma’s plans, however, is likely to run into practical obstacles.

One key focus is promoting transparency as the combination of growing demand for environmental, social and governance-focused investments and rapidly evolving markets has created room for greenwashing. 

As interest in green investment products increases, there can be a misalignment between the demand for investments that can make a sustainability impact and the available investment opportunities marketed as ‘sustainable’.

Greenwashing can come in multiple forms including misrepresentation, mislabelling, mis-selling and mispricing. 

In its roadmap, Esma proposes to find a definition of greenwashing that “can help drive the supervisory work in a coordinated and efficient manner across sectors and across the EU based on clear rules in a completed rulebook”.

Esma told Sustainable Views that it is not seeking a legal definition of greenwashing. Instead, it will come up with a description of the various forms this phenomenon can take, which in turn can support any future assessments made by the EU Commission and co-legislators on the extent to which EU rules for financial markets are well suited to prevent greenwashing.

Needed regulation

Carola van Lamoen, head of sustainable investing at asset manager Robeco, welcomes the approach by Esma. “We need a shared regulatory understanding of the new rules under the [Sustainable Finance Disclosure Regulation] and how to identify and address greenwashing.” 

She adds that there is a need for a “clear level playing field” and regulation to support the overarching goal of “financing the transition”.

However, she says that “the proof of the pudding is in the eating”. Establishing a definition that takes into account different sectors will not be an easy task. But if Esma succeeds in coming up with a common definition, it will be easier to compare different approaches. 

Under SFDR, concepts like sustainable investing are now broadly defined; market participants are making their own interpretations of it but “Esma could play a role in interpreting these concepts and ensuring that implementation is harmonised across the board”, van Lamoen says.

Johan Vanderlugt, sustainable finance specialist at wealth management company Van Lanschot Kempen, also approves of Esma’s plan. He says the regulator is well placed from its position as an EU “super watchdog” to promote “supervisory convergence” and “minimise regulatory arbitrage”. 

He says: “Greenwashing is damaging both for the individual investor as well as for the sustainable investment industry as a whole. Having regulators intervene in order to enhance investor protection and enforce good market practices will contribute to higher market standards.”

Putting it into practice

Looking ahead, Esma says its work on greenwashing will stretch between 2022 and 2023. The regulator plans to consider examples of greenwashing from different sectors, which will help identify common features across sectors as well as sector-specific characteristics.

Vanderlugt stresses that having a clear definition of greenwashing is helpful but cannot be the sole answer.

Unambiguous regulations, a level playing field in the way national competent authorities apply local guidelines, and the availability of a single rulebook are important ingredients that help mitigate the risk of unintentional greenwashing.

Vanderlugt also says the investment management industry itself is making efforts to standardise disclosure, as evidenced by the CFA Institute’s global ESG disclosure standards for investment products.

He says: “One of the core design principles of this initiative is around reliability. Disclosures should fairly represent the investment product’s ESG approaches and not be false or misleading. Having an independent third party provide assurance for this is recommended.”

Access to reliable data is key for successful implementation for both the EU taxonomy and SFDR, van Lamoen says. Currently, the industry relies on third-party data providers that follow different methodologies to assess ESG issues, but this can lead to different conclusions. 

Even if greenwashing is defined, applying it in practice will not be without its teething problems. Van Lamoen says Esma will need to find a balance between giving flexibility to financial institutions while ensuring their objectives are truly sustainable.

A service from the Financial Times