Several initiatives have been taken at EU level to minimize the risk of greenwashing. Specifically, the European Commission (EC) has created the EU framework for sustainable finance in its strategy for financing the transition to a sustainable economy (July 6, 2021). As a first step, a science-based classification system for sustainable economic activities, the EU Taxonomy(Regulation (EU) 2020/852), is intended to provide protection against greenwashing. In addition, the importance of developing binding guidelines, standards and labels was recognized in order to channel funds into sustainable investments and create a transparent framework against greenwashing. Disclosure requirements for both companies and investors are seen as another tool to combat the risk of greenwashing, e.g. the Non-Financial Reporting Directive (NFRD), the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR).
Ensuring an adequate level of enforcement in the EU and monitoring compliance with the respective legal framework for sustainable finance is the responsibility of the supervisory authorities. In May 2022, the EC mandated the European Supervisory Authorities (EBA, ESMA and EIOPA) to prepare a progress and final report on greenwashing risks and the supervision of sustainability strategies. In response, the ESAs launched a joint call for evidence in November 2022 to gather stakeholders' views on how to better understand the key characteristics, drivers and risks associated with greenwashing and to collect examples of potential greenwashing practices. Similarly, ESMA has launched a consultation on guidelines for fund names that use ESG or sustainability-related terms to tackle greenwashing through appropriate labeling.
Finally, the issue of protecting clients/investors from greenwashing has become a priority for the EBA, ESMA and EIOPA as part of their respective sustainable finance strategies. The ESAs' work on greenwashing risks is currently designed to build adequate supervisory capacity, develop a definition and common understanding of greenwashing among financial market participants, assess the differences between national supervisors on this topic to identify inconsistencies and gaps in legislation that should be addressed by the EC, assess these risks from a prudential perspective and provide the necessary regulatory framework tools to mitigate them. The ESAs will also examine the extent to which the EU supervisory framework and the single rulebook need to be amended and make recommendations accordingly.
