For several years now, one of the dynamically and continuously growing groups of assets managed by investment firms has been balanced funds, or so-called. ESG-oriented funds. We also have two sets of regulations in the European Union relating to this area: SFDR (Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector)However, none of these regulations define what greenwashing is and which funds, investments, or financial products may or may not be labeled as „green,” „sustainable,” or „eco-friendly.”.
In the fall of 2022, three EU supervisory authorities, namely ESMA (European Securities and Markets Authority), EBA (European Banking Authority), and EIOPA (European Insurance and Occupational Pensions Authority), announced consultations in order to collect examples of greenwashing in financial markets. The consultation ended in mid-January and the results will be announced shortly. As part of my work at ESMA SMSG (Securities and Markets Stakeholders Group), I participated in the work of the group that provided market participants' responses to this consultation. It took us the longest to determine in which cases we can talk about greenwashing in relation to financial products and services.
There is no clear answer to this question, as the regulatory framework is not yet complete. The conclusions from the consultation will likely be used by supervisory authorities to formulate recommendations for the European Commission, which will be useful in filling gaps in the regulations. After all, can we talk about greenwashing today if there is no definition of it?
What should the definition of greenwashing be? It should certainly focus on misleading customers or consumers about the nature of a financial product. But is greenwashing only intentional, deliberate, or can it be unintentional (e.g., when a financial institution uses data obtained in good faith from companies that have distorted reality)? Is greenwashing different when it comes to non-professional customers than when it comes to other institutions that should use their professional judgment? Should the concept of greenwashing, whose name is associated with environmental issues, also apply to misleading statements regarding social issues, human rights, or corporate governance principles? How should greenwashing be defined so that it applies not only to the current situation (what assets—sustainable or not—the fund is investing in today), but also to the future (will the fund's investments in companies transitioning to low-carbon achieve their goal in a few or several years)?
Greenwashing will be the subject of many more discussions in the coming months and years. This is a good thing, because we are finally moving from recognizing individual cases to a stage where regulators are addressing the phenomenon and developing tools—hopefully effective ones—to combat it.
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