Greenwashing refers to the practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact basic environmental standards have not been met (Recital 11 of the Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 - Taxonomy Regulation).

         
          
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In more detail, according to new rules financial market participants offering ‘green’ financial products will have to:

 

  • disclose how they reach their environmental sustainability target under the Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (Sustainable Finance Disclosure Regulation (SFDR) – having some freedom in how to best describe their environmental investment strategies;

 

  • reference the EU taxonomy when describing the degree of ‘greenness’ of the given product.

 

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See also:


Sustainable finance


This is intended to introduce an element of comparability, without prejudging those green investments that do not contain underlying economic activities from the EU taxonomy.

 

The greenwashing is high on the regulatory agenda, as the ESMA's Chair put it in November 2021:

"I believe I have explained that countering greenwashing is central to this objective and to securing the overall credibility of a more sustainable financial system. As ESMA, together with national supervisors, we will commit to doing everything in our powers to tackle greenwashing.

To this end, we need to ensure that transparent and reliable disclosures are in place, that investors are sufficiently educated on the fundamentals of sustainable investing and that governance mechanisms are in place to ensure the appropriate level of stewardship on the decisions that companies take with regards to sustainability" (Keynote Speech Verena Ross, Chair! European Securities and Markets Authority (ESMA)! DSW Conference “ESG – Next Level Reporting, Risk Management, Strategy and Responsibility”, 19 November 2021).

  

 

 

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Steven Maijoor, ESMA Chair, the three (apparent) paradoxes of sustainability reporting and how to address them, 8 December 2020, ESMA32-67-765

 
I would like to emphasise that we should not be naïve regarding the risk of greenwashing. Whenever information is used in investment decisions and relevant to the allocation of captial, and it affects the fortunes of companies and individuals, there are risks that the information is biased, or even misleading. There is no difference here between financial and non- financial information, and we should do our utmost to reduce as much as possible the risks of non-financial reporting scandals occuring, which would undermine trust in sustainabilty finance.
What is often emphasised about greenwashing is the element of misconduct that leads representatives of issuers or financial market participants to provide false or misleading information to the market, regarding the sustainability profile of a certain company or investment portfolio. This is indeed an important aspect, but it is only the tip of the iceberg.
Greenwashing is also an issue that has a lot to do with the degree of robustness of the framework underlying the reported data.
 

 

 

 

Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088, Recital 11

 

Making available financial products which pursue environmentally sustainable objectives is an effective way of channelling private investments into sustainable activities. Requirements for marketing financial products or corporate bonds as environmentally sustainable investments, including requirements set by Member States and the Union to allow financial market participants and issuers to use national labels, aim to enhance investor confidence and awareness of the environmental impact of those financial products or corporate bonds, to create visibility and to address concerns about ‘greenwashing’. In the context of this Regulation, greenwashing refers to the practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact basic environmental standards have not been met. Currently, a few Member States have labelling schemes in place. Those existing schemes build on different classification systems for environmentally sustainable economic activities. Given the political commitments under the Paris Agreement and at Union level, it is likely that more and more Member States will establish labelling schemes or impose other requirements on financial market participants or issuers in respect of promoting financial products or corporate bonds as environmentally sustainable. In such cases, Member States would use their own national classification systems for the purposes of determining which investments qualify as sustainable. If those national labelling schemes or requirements use different criteria to determine which economic activities qualify as environmentally sustainable, investors would be discouraged from investing across borders due to difficulties in comparing different investment opportunities. In addition, economic operators that wish to attract investment from across the Union would have to meet different criteria in different Member States in order for their activities to qualify as environmentally sustainable. The absence of uniform criteria would therefore increase costs and significantly disincentivise economic operators from accessing cross-border capital markets for the purposes of sustainable investment.

 

Recital 9 draft Taxonomy Regulation

https://data.consilium.europa.eu/doc/document/ST-14970-2019-ADD-1/en/pdf


(9) Offering financial products which pursue environmentally sustainable objectives is an effective way of channelling private investments into sustainable activities. National requirements for marketing financial products or corporate bonds as environmentally sustainable investments, including the requirements set out by Member States and the Union to allow the relevant market actors to use a national label, aim to enhance investor confidence and awareness of environmental impact, to create visibility and to address concerns about “greenwashing”. Greenwashing refers to the practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact it does not meet basic environmental standards. Currently a few Member States have in place labelling schemes. Those existing schemes build on different taxonomies classifying environmentally sustainable economic activities. Given the political commitments under the Paris Agreement and at Union level, it is likely that more and more Member States will establish labelling schemes or other requirements on financial market participants or issuers in respect of financial products or corporate bonds marketed as environmentally sustainable. In doing so, Member States would be using their own national taxonomies for the purposes of determining which investments qualify as sustainable. If such national requirements are based on different criteria as to which economic activities qualify as environmentally sustainable, investors will be discouraged from investing across borders, due to difficulties in comparing different investment opportunities. In addition, economic operators wishing to attract investment from across the Union would have to meet different criteria in the various Member States in order for their activities to qualify as environmentally sustainable for the purposes of those different labels. The absence of uniform criteria will thus increase costs and create a significant disincentive for economic operators, amounting to an impediment to access cross-border capital markets for sustainable investments.
The criteria for determining whether an economic activity is environmentally sustainable should be harmonised at Union level, in order to remove barriers to the functioning of the internal market with regard to raising funds for sustainable projects, and prevent their future emergence. With such harmonisation economic operators will find it easier to raise funding for their environmentally sustainable activities across borders, as their economic activities can be compared against uniform criteria in order to be selected as underlying assets for environmentally sustainable investments. It will therefore facilitate attracting investment across borders within the Union.

 

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