ESAs put forward common understanding of greenwashing



As part of its aspiration that supervisors play an essential role in identifying, preventing, investigating, sanctioning, and remediating greenwashing, the European Commission (EC) has issued a request for input from the three European Supervisory Authorities (ESAs) on greenwashing risks and supervision of sustainable finance policies (the EC Request).

In the context of the EC Request, the ESAs launched a joint call for evidence (CfE) at the end of the year 2022 to gather input from stakeholders on the understanding of greenwashing and examples of greenwashing behaviours on the market.

On 1 June 2023, the ESAs presented their common understanding of greenwashing as a response to the EC Request. Each of the ESAs has also taken the opportunity to publish a progress report including input on (1) the definition of greenwashing and the forms it can take in the financial sector, (2) the risks greenwashing poses to investors and financial markets, (3) the implementation, supervision and enforcement of sustainable finance policies aimed at preventing greenwashing and (4) potential improvements to the regulatory framework.

This publication will intentionally focus on the content of the progress report of the European Securities and Markets Authority – ESMA (the Report).

Common understanding of “greenwashing”

The ESAs’ common understanding of greenwashing is “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.”

Additional features of greenwashing include, inter alia, that it can be:

  • intentional or unintentional;
  • at entity level, financial product level or financial services provision level;
  • within or outside the EU regulatory framework;
  • environmental claims, but also any claim on social and governance aspects; and
  • also triggered by third parties (i.e. label agencies, rating agencies, etc.).

With respect to the “misleading” element, the Report outlines that it can be (i) due to the omission of information or to the actual provision of information that is false or deceiving (including, but not limited to, misclassification, cherry-picking, irrelevance, misuse of ESG terminology, “empty” claims or exaggerations); and (ii) due to misleading actions – i.e. identification of a product without real sustainable features for a client with a sustainability preference.

In terms of the various channels of transmission through which misleading claims can be communicated, the Report underlines the fact that regulatory documents are less exposed to greenwashing risks than marketing materials, labels, and voluntary reporting, though they should not be underestimated or overlooked.

The Report also clarifies that, while “greenwashing risk” refers to the risk of misleading sustainability claims occurring and misleading investors in their decisions, “greenwashing-related financial risk” refers to the broader financial risks greenwashing occurrences may pose to entities, financial markets and investors. In addition, greenwashing risk may be distinguished from greenwashing occurrence – i.e. the realisation of the greenwashing risk.

Greenwashing is indeed a system-wide risk that can spread and impact the market in general. The ESAs underline four categories of financial risks that can be impacted from greenwashing: liquidity risks, credit risks, market risk and contagion risk.  It also impacts the non-financial sector by increasing the public’s misperception, which can lead to a delay in climate change mitigation actions, as well as a loss of trust from investors in sustainable finance and ESG market, which may decrease support of the transition to a sustainable economy.

In its Report, ESMA has adopted a double materiality approach, addressing claims when they are about the exposure of a product to sustainability risks and claims about the impact of the financial product or activities on the environment or the society.

Exposition to greenwashing in the current market and how to mitigate the area-specific greenwashing risks

  1. Actors

The Report essentially outlines three roles that can be played by market players in any given occurrence of greenwashing:

  • Triggers – i.e., initiators – such as issuers, investment managers or benchmark administrators;
  • Spreaders; and
  • Receivers – i.e., the investors;
  1. Identification of areas of the sustainable investment value chain most exposed to greenwashing

Examples of topics of claims

  • Impact claims: that the Report outlines that  there is no definition of “impact” or “impact investing” in regulations, which may lead to misleading impact claims relating to an exaggeration based on an unproven causal link between the ESG metric and real world-impact; one of the most frequent situations being the lack of clarity about where the impact is factored or achieved.
  • ESG strategy, objectives, characteristics: for investment funds, the main issue highlighted by the Report is the extent and nature of the consideration of environmental and social characteristics or contribution to a sustainable objective which can be too vague, exaggerated, or incomplete. Non-binding mentions of environmental and social characteristics promotion, cherry picking, or irrelevance of information (ex: mention of positive impacts by planting trees, but not mentioning the business-as-usual financing of gas and oil sector) are also amongst the most frequent misleading situations.
  • Pledges about future performance: given that methodologies and criteria are still in the process of development, net-zero or transition claims present a number of concerns, such as premature commitment, a lack of context on relative emission reductions, no regular progress, a lack of transparency of carbon credit, etc.
  • Others: engagement policy, ESG credentials, role of board and senior management with regards to sustainability.


The risk lies particularly within forward-looking information and communication about future ESG performance (net zero, transition plans, contribution to SDGs, unclear and insufficient ambition), as well as engagement and lobbying activities. It essentially spreads through marketing and corporate communications (e.g., non-financial statements, financial statements, prospectuses, press releases, non-mandatory website disclosures).

The Report outlines the absence of requirement to publish audited sustainability reporting, the lack of expertise and skills, the difficulties of gathering data throughout the value chain, and the less rigorous control than with financial information, as the main underlying drivers.

ESMA highlights possible ways to mitigate these risks, notably through new initiatives such as the Directive corporate sustainability reporting (CSRD), the European Sustainability Reporting Standards (ESRS) and the Directive on Corporate Sustainability Due Diligence (CSDDD), to enhance transparency on assumptions and key parameters, to provide a non-misleading sustainable profile, to avoid cherry-picking and inconsistencies in the information communicated, and to enforce the responsibility to communicate in a balanced manner.

Investment managers

The Report outlines several risks linked to investment managers’ activities, such as impact claims, statements about engagement with investee companies, about a fund or asset manager’s ESG strategy and ESG credentials (such as ESG labels, ESG ratings or ESG certifications), fund names, and claims about governance around ESG. Fund and benchmark naming issues particularly came out as one of the most important risks, including, but not limited to, funds with “sustainable” or “sustainable growth” in their names without disclosing under Article 8 or Article 9, as they should. The Report also outlines that a difference should be made between “buying impact” (Art 9 SFDR) and “creating impact” (Article 8, or Article 9 depending on a specific and transparent understanding of DNSH and objective criteria). Finally, the Report also highlights the extent and nature of consideration of environmental or social characteristics as potential risk, where it is too vague or incomplete, or where there is a lack of commitment.

According to ESMA, the main drivers are notably the lack of clarity of certain concepts under SFDR, regulatory gaps, inconsistencies, a high level of flexibility under SFDR, and the misuse of SFDR as a label regime.

As potential remediation actions, ESMA suggests bringing additional clarification on best practices to define the minimum “contribution to a sustainable objective” and other SFDR terms, to standardise disclosures about engagement and to align names of funds and benchmarks as much as possible.

It is important to note that ESMA suggests addressing the misuse of SFDR, perceived as a label regulation, by introducing a new label legislation,

Benchmark administrators

With respect to benchmark administrators, the Report outlines that risk areas typically lie with claims relating to sustainable and ESG labels and within the fund industry, the lack of transparency about methodologies and relevant data collection, the fact that a benchmark can be different from stakeholders’ expectations, and the omission to publish relevant ESG metrics in regulatory periodic disclosures.

The highlighted main drivers are, inter alia, the lack of specific rules, the absence of clear labelling and lack of clarity on the use of EU Climate Benchmarks.

ESMA suggests enhancing the interaction between the EU Benchmark Regulation and the most recent pieces of the sustainable finance framework to mitigate the risks of greenwashing.

Investment services providers

Risks identified by ESMA in relation to investment service providers include, inter alia, the extent to which advice to retail investors consider sustainability and when provider may not provide suitable investment advice, as well as impact claims (cfr. Investment managers above) in the context of the suitability assessment.

ESMA has pinpointed potential drivers, such as a deficit of ESG knowledge, gaps of ESG for certain financial products, and the confusion around the “sustainability preference”.

To mitigate these risks, the Report suggests reinforcing the regulatory framework on the sustainability preference, improving sustainable finance expertise, and increasing retail investors’ ESG literacy.

Preliminary actions suggested by the ESAs

Reinforce the regulatory framework

With a view to strengthening the current regulatory framework, ESMA suggests clarifying specific terms of the regulations, including what qualifies as “contribution to sustainable objective”, the definition of “impact” and how it is factored in or achieved, the DNSH principle and interactions between SFDR, Taxonomy, Benchmark Regulation.

The Report also recommends the introduction of an EU-wide standard for measuring positive and negative impact on social factors.

It finally prescribes to complement the EU regulatory framework, by enhancing the recognition of transition finance to ease the mismatch between high demand for ESG products and limited taxonomy-aligned investment opportunities, by increasing the use of standardised and audited sustainable reports, notably through the application of CSRD, by establishing a clear substantiation of engagement efforts, and by checking consistency between an entity’s lobbying initiatives and its stated ESG goals.

Upgrading firms’ governance, IT system, skills

ESMA stresses the fact that it is of upmost importance for market participants to communicate sustainability information in a balanced and substantiated manner, and therefore suggests implementing monitoring systems and regular reporting on progress. For that purpose, market participants may call on third-party providers to proceed with independent and objective verifications.

Reliable and comprehensive sustainability data

The Report highlights the importance of having reliable and comprehensive sustainability data, which can be achieved by, inter alia, increasing recourse to external validation and assessment, and seeking clarification on ESG methodologies and the level of ambition of a given claim, in order to tackle the confusion between a claim about ESG process being implemented and concrete progress being achieved. 

Supporting comprehensibility for retail investors

According to the Report, comprehensibility for retail investors could notably be achieved by introducing a labelling scheme for sustainable financial products in the EU. Financial and sustainability literacy gaps between retail investors should also be tackled, notably by adding minimum safeguards to products using ESG-or sustainability-related product names to avoid misleading investors on the ambition of such products.

Monitoring necessity of greenwashing risks

As monitoring greenwashing risks is essential, ESMA is in the process of expanding its monitoring framework to address greenwashing risks and shows its willingness to support national competent authorities (NCAs) in this task, as they are at the front line of the monitoring process.

Amongst other things, consumers’ greenwashing-related complaints should also be looked at and a coordinated approach between ESMA and the NCAs should be established for the collection of such complaints.

Finally, ESMA outlines the importance of using artificial intelligence tools to support supervision of ESG-related disclosures.

What’s next?

In accordance with the EC Request, the ESAs will publish their final recommendations by May 2024, including any changes to the current EU regulatory framework that they deem necessary.