ESMA advisory group calls for caution on greenbleaching supervision

Greenbleaching should not be sanctioned while there is no requirement to disclose sustainability, but ESMA should monitor prevalence, group recommends.

ESMA’s stakeholder advisory group has urged caution when dealing with “greenbleaching” – managers understating the sustainability credentials of products – as it may not be sanctionable, but said the regulator should monitor its occurrence.

The Securities and Markets Stakeholder Group (SMSG) was asked to answer four supplementary questions by a member of ESMA’s board of supervisors after it delivered its response to a call for evidence on greenwashing issued by the EU’s financial regulators.

The member asked how the group’s advice can contribute to a “holistic definition” of greenwashing, whether and why greenbleaching was a problem from a supervisory perspective, how ESMA can deal with the decline in Article 9 funds, and how intent should be considered when it comes to greenwashing.

In its response, released on Thursday, the SMSG cautioned against sanctioning firms that understate the sustainability credentials of their products. While this can be considered misleading, it said, the phenomenon is often the result of managers preferring to err on the side of caution to avoid being accused of greenwashing.

As long as there is no legal obligation to disclose how sustainable a product is, not making these claims cannot be considered “misrepresentation” and should not be sanctioned, the group continued. At the same time, it noted that the incidence of greenbleaching is relevant to ESMA, and recommended that the regulator should monitor its occurrence to ensure that sustainable finance legislation is achieving its goal.

The SMSG was set up to advise ESMA on its policy work and is consulted on technical standards, guidelines and recommendations made by the regulator. Its membership includes consumer groups, investors and industry bodies and academics.

Looking at what action ESMA should take on the wave of downgrades from Article 9 under SFDR, the SMSG noted the lack of clarity on what constitutes a sustainable investment and said that uncertainties “drive funds away from an Article 9 qualification”. “The risk arises that the Article 8 category becomes meaningless while the Article 9 category becomes empty,” it warned.

The fund downgrades are an example of how regulatory uncertainties may lead to greenbleaching, and may in the end result in less transparency and clarity for retail investors, the SMSG said. In this regard, it noted that ESMA has an important role to play in monitoring market evolution, examining its causes and flagging these to the European Commission, even if the solution for these questions is within the remit of the commission itself.

Looking at the role of intent in greenwashing, the SMSG said definitions should be linked as far as possible to existing requirements on misleading information.

This means that the relevance of intent depends on the approach taken. For instance, if a supervisor takes action under MiFID II, then the only relevant factor is whether the investor was misled, whereas if damages are claimed for unfair competition then negligence or intent will often be relevant.

The SMSG also said it was “of the utmost importance” to attribute responsibility at the correct level of the value chain. For instance if a manager received incorrect data from an issuer or data provider then responsibility should be assigned at the correct level.

Failure to meet the investment objective of a fund does not necessarily mean that greenwashing has taken place, the group added, nor do all instances of incorrect or misrepresented information automatically count as greenwashing.

Finally, the SMSG recommended that investor expectations should be well managed, so investors “do not expect more than what product providers claim” such as from Article 8 funds.

The SMSG has also set up a working group to provide further input.