© Reuters. FILE PHOTO: European Union flags flutter outside the European Commission headquarters in Brussels, Belgium August 21, 2020. REUTERS/Yves Herman
By Huw Jones
LONDON (Reuters) – The European Union’s markets watchdog said on Friday it will start working on a legal definition of “greenwashing” to underpin enforcement action as trillions of euros flow into funds that are advertised as climate-friendly.
Regulators are playing catch-up with the deluge of money going into investments that tout their environment, social and governance (ESG) attractions.
Few if any investment firms have been punished for “greenwashing”, or over-inflating their ESG credentials, as there are no hard rules on what it means.
The European Securities and Markets Authority (ESMA) said that in an ideal scenario it would be tackling greenwashing based on a complete set of rules that set boundaries on market behaviour and practices that are not allowed.
“However, there is now a real need to address greenwashing without delay, even if all the legislative stepping stones are not fully in place yet,” ESMA said in its sustainable roadmap document published on Friday covering work planned to 2024.
Defining the “greenwashing phenomenon” can drive supervisory work by regulators in a coordinated and efficient manner, ESMA said.
It will determine how greenwashing differs from other types of mis-selling in financial products, how it can spread and what measures can be taken to promote transparency.
The EU is rolling out new ESG disclosure requirements for companies and asset managers, and a “taxonomy” or list of what can be considered “green” investments.
“Ensuring the consistent and effective application of the EU sustainable finance rulebook is key to preventing greenwashing,” ESMA said.
The watchdog will look at the extent to which national regulators in the bloc can use their existing powers to exercise a form of “professional scepticism to second-guess” the sustainability “reality” in what’s being publicly disclosed.
Earlier this week, ESMA said it was also scrutinising the market for ESG ratings, used by investors to help choose sustainable investments.
EU watchdog to define ‘greenwashing’ as sustainable funds rocket
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