Further Clarifications on Anti-Greenwashing Standards for Financial Products in the European Union
In its Sustainable Finance Roadmap 2022-2024, European Securities and Markets Authority ("ESMA") has recently underscored the importance of developing a cohesive supervisory approach in the area of sustainable finance across Europe. Conscious that growing investor demand for environmental, social, governance ("ESG") financial products and fragmentation in how ESG rules are being read creates room for greenwashing, ESMA emphasized its intention to work closely with the national EU regulators to address with coordinated action greenwashing practices over the next two years.
In the asset management field, greenwashing has been of concern for the EU regulators for the past few years, as some asset managers, in an effort to satisfy growing demands of investors, have been overstating the sustainability profile and characteristics of the funds they manage/market. The regulators have become particularly attentive to such practices and expect asset managers to substantiate ESG claims that they put forward.
Regulation 2019/2088 of November 27, 2019, on sustainability‐related disclosures in the financial services sector (the "SFDR Regulation"), which came into effect on March 10, 2021, in all EU Member States, imposes significant additional disclosure obligations on its in-scope entities, such as investment managers and investment firms providing investment advice. The purpose of the SFDR Regulation is to avoid the greenwashing of financial products and financial advice in the EU by imposing on in-scope entities, including asset managers and investment advisors, an obligation to provide more substantiated, sustainability-related information to allow investors to make informed investment decisions in line with their sustainability objectives.
In this context, on April 6, 2022, the European Commission adopted regulatory technical standards ("RTS") to be used by financial market participants when disclosing sustainability-related information under the SFDR Regulation. The RTS aim at standardizing ESG investment disclosures to enhance the transparency and comparability of such disclosures. They include guidelines regarding the details of the content and presentation of the information in relation to the principle of "do no significant harm" (also used in the Taxonomy Regulation). This includes guidelines regarding the content, methodologies, and presentation of information in relation to sustainability indicators and adverse sustainability impacts, as well as the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in precontractual documents, on websites, and in periodic reports.
The standards include a "comply or explain" mechanism, which requires market participants to "comply" with the rules by providing specified qualitative and quantitative information describing efforts to reduce negative environmental and social impacts of investments, or "explain" why certain investments do not cause environment or social injustice. The standards also describe rules on website disclosures and product-level periodic disclosures on financial products. The technical standards will now be subject to review by the European Parliament and Council over the next three months, and in case of no objections, the RTS will then apply beginning January 1, 2023.
