Greenwashing in the EU financial markets: sustainable finance status update

Greenwashing in the financial markets generally

On 4 June 2024, the EU authorities for the banking and insurance sectors and the securities markets EBA, EIOPA and ESMA considered the concept of ‘greenwashing’ in the financial markets against a background of concerns that financial products, such as loans, bonds, investments and insurance, were all too easily promoted as ‘ESG’ or ‘sustainable’. In their respective final reports, the ESAs published their common high-level understanding of “greenwashing” as a practice whereby sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. The European authorities stress that financial market players have a responsibility to provide sustainability information that is fair, clear, and not misleading. See the final reports here.

Funds and investments

For fund managers and financial advisers, the EU Sustainable Finance Disclosure Regulation (SFDR) sets out requirements for disclosure of information and investment objectives to investors regarding the promotion of financial products with environmental or social characteristics (Article 8 – Products) or with sustainable investment as their objective (Article 9 – Products). For example, according to the SFDR, a sustainable investment is an “investment that contributes to an environmental or social objective, as measured by key indicators or a reference benchmark; does not significantly harm any of the environmental or social objectives; ensures that the investee companies follow good governance practices, such as respect for human rights, anti-corruption and anti-bribery measures, and sound management structures.” For further information on this subject, see this article.

In addition to disclosure requirements applying to the activities and performance of such Article 8 or Article 9 funds, asset managers of regulated investment funds under UCITS and alternative investment funds under AIFMD must also be careful with the naming of such funds. On 14 May 2024, the European Securities and Markets Authority (ESMA) published Guidelines (click) on funds’ names using ESG or sustainability-related terms.

ESMA distinguishes 3 levels of recommendations for funds names:

1. all funds with names that include terms related to green, social, governance, transition, impact, ESG, SRI and other environmental, impact, sustainability-related terms:
   1. should invest at least 80% in investments that meet environmental or social characteristics or sustainable investment objectives as set out under SFDR; and
   2. should apply the CTB exclusion criteria under BMR;
2. funds with names that include environmental, impact or sustainability-related terms should apply also the PAB exclusion criteria under BMR; and
3. funds with names that include sustainability-related terms should commit to invest meaningfully in “sustainable investments” as defined under SFDR.

The guidelines published by the ESMA will be translated into the official EU languages and published on the ESMA website. After the publication, national competent authorities must notify ESMA within two months whether or not they comply with the Guidelines. 

Benchmarks

For climate benchmarks, the EU Benchmark Regulation (BMR) sets out the basis on which benchmark administrators may classify benchmarks, such as indices, as Climate Transition Benchmarks (CTBs) or EU Paris-Aligned Benchmarks (PABs). Essentially, BMR prescribes both (A) exclusion criteria for CTBs (exclusion of controversial weapons, tobacco, and violators of UNGC principles and OECD MNE Guidelines) and additional exclusion criteria for PABs (additional exclusion of companies involved in certain hard coal, lignite, oil & gas and GHG intense emission) and (B) disclosure of greenhouse gas emissions of the underlying assets and the relevant methodology.

Bonds

Effective December 2024, bonds issued in the EU may be designated and labelled as ‘EU green bonds’ if they meet the requirements of the EU Green Bond Regulation (GBR), which also includes provisions relating to ‘sustainability linked’ bonds. For more information on the GBR, see this article.

Implications for financial markets

In view of the recent and expected developments on greenwashing for financial products, and taking into account upcoming review of UCITS and AIFMD, financial market participants should consider whether to update product disclosure, marketing materials, pre- and post-contractual information, prospectuses and other disclosures in relation to any ESG and sustainability related products, as well as to update internal processes, training and monitoring of client preferences in this area.

If you have any questions regarding the above, please contact Marieke Driessen of our Stibbe Financial Markets team.