Greenwashing – Overview of European and Swiss initiatives (Part I)
It is now impossible to talk about sustainable finance without mentioning the risk of greenwashing. Both the legislator and the financial market supervisory authorities, in Switzerland and in the EU, consider it a major challenge to the effective transition to a low-carbon economy. Part I of this paper will look at some of the regulations devised in the EU to counter greenwashing (Part II will address the Swiss aspects).
I. About the risk of greenwashing
In recent months, the attention around the risk of greenwashing has increased considerably. Greenwashing is seen as a significant threat to the credibility of sustainable finance and investor protection.
Whether for legislators, financial market supervisors or market participants, preventing greenwashing has become a central issue in the context of promoting sustainable finance.
In the United States, for example, the Securities and Exchange Commission (SEC) announced on May 25, 2022, two types of measures it plans to introduce to combat greenwashing. The first measure focuses on investment funds that present themselves as “green” or “ESG oriented” to prevent misleading or deceptive fund names. According to the new rules, the use of such labels will be subject to conditions (product labelling). The second measure, the ESG Disclosures for Investment Advisers and Investment Companies, aims to introduce additional disclosure requirements to enhance transparency and comparability of ESG related information so that investors can make better informed decisions.
Approaches similar to those advocated by the SEC are being adopted or are being discussed in the EU (and Switzerland) to combat greenwashing.
By the way, what is greenwashing?
There is currently no legal definition of this concept. It is agreed, however, that greenwashing is a form of deception.
In its Sustainable Finance Roadmap 2022-2024, the European Securities and Markets Authority (ESMA) defines greenwashing as “market practices whereby the publicly disclosed sustainability profile of an issuer and the characteristics and / or objectives of a financial instrument or a financial product and the related processes do not properly reflect the underlying sustainability risks and impacts. These market practices can be both intentional and unintentional and occur either by action or omission.”
II. EU regulatory approach on greenwashing
The European Commission has not adopted regulations specifically aimed at combating greenwashing. However, it has developed various set of rules that, directly or indirectly, have the effect of reducing the risk of greenwashing. As conceived in the EU regulation, the prevention of greenwashing largely relies on greater transparency regarding the features of the financial products offered and their effective sustainability performance.
These set of rules include:
- EU Taxonomy : This classification system aims at setting a common framework and terminology for market participants. By doing so, investors have access to more reliable and comparable sustainability information, which ultimately should reduce the risk of making investment decisions based on misleading or false information.
- European Green Bond Standard : This initiative also aims to create a more transparent investmentenvironment for investors and bond providers so that misleading or deceptive practices should no longer be possible.
- EU Consumer Rules : The European Commission has proposed to update the EU consumer protection rules to strengthen producers’ duty to inform about products’ durability and reparability. The proposals also include a “ban on greenwashing and planned obsolescence” which would be implemented by amending the Unfair Commercial Practices Directive (UCPD). These measures intend to empower consumers by fostering informed decisions. Although these legislative changes do not concern sustainable finance per se, we believe they reflect a general and interesting trend towards improving consumer (or investor) protection in order to give them an active and central role towards the green transition.
Moreover, the EU’s financial market supervisory authority, the European Securities and Markets Authority (ESMA),has also identified the risk of greenwashing as a priority and a key challenge for sustainable finance. In its prospective report for the period 2022 – 2024, ESMA sets various categories of actions to tackle greenwashing from a regulatory standpoint. These actions include in particular (i) developing a common understanding of national competent authorities’ supervisory role in the area of sustainable finance and specifically on greenwashing and (ii) collecting and studying empirical evidence regarding the functioning of ESG markets and ESG products as well as cases of greenwashing to better understand current and developing market practices.
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 This is the first part of a two-part paper which provides an overview of EU Initiatives (Part I) and Swiss Initiatives (Part II) aiming to prevent greenwashing.
 ESMA Sustainable Finance Roadmap 2022-2024 dated February 10, 2022, Nr. 18 (available at https://www.esma.europa.eu/sites/default/files/library/esma30-379-1051_sustainable_finance_roadmap.pdf).
 See footnote 4.