ESAs urged to differentiate between intentional and unintentional greenwashing

The European Fund and Asset Management Association (EFAMA) has called for the European Supervisory Authorities’ (ESAs) work on greenwashing to differentiate between misleading with intent and uncertainty on regulations.

In its response to the ESAs’ consultation on greenwashing, EFAMA stated that all market actors were concerned about the risk of greenwashing amid an environment with unclear definitions at EU level on key sustainable finance concepts, and a lack of complete, comparable and transparent ESG data.

EFAMA stressed that the core attributes of greenwashing need to be understood to tackle misleading practices, which would therefore strengthen the integrity and effectiveness of EU financial markets.

It called for greenwashing assessments to consist of two components: Whether sustainability-related practices or features of a product were knowingly misrepresenting, and whether there was an objective or intention to mislead or induce the receiver of the sustainability claim.

Alongside this, there may be still be greenwashing in cases of gross negligence on the financial market participants making the claim where there was no intention to mislead or induce the receiver of the sustainability claim, EFAMA said.

Furthermore, the association noted that significant areas of financial institution supervision already addressed several aspects of greenwashing, and therefore any current regulatory gaps should be identified first before proposing new legislation or guidance.

It also emphasised the need for an aligned and consistent approach when addressing greenwashing risks in the financial sector to reduce confusion and the risk of harmful market fragmentation.

“Intentionally misleading behaviour relating to sustainable investments should not be tolerated, in the same way that other misleading practices regarding risk or performance are not tolerated,” commented EFAMA regulatory policy adviser, Anyve Arakelijan.

“However, considering the current degree of regulatory uncertainty and ongoing evolution, we must be careful to not apply the term greenwashing too broadly.

“Strengthening the understanding of what constitutes greenwashing and having harmonised supervisory action to address this risk is crucial.

“Otherwise, investor confidence in sustainable finance could be severely undermined, threatening efforts to transition to a more sustainable economy.”

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