European Union Regulators Call for Increased Action to Combat Rising Greenwashing Risks in the Financial Sector

European financial regulators have emphasized the need for intensified supervisory actions and enhanced access to data and resources to combat the growing risk of greenwashing within banks, investment firms, and insurance companies. This call to action was outlined in recent reports from the European Supervisory Authorities (ESAs), which consist of three primary financial regulatory agencies: the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA), and the European Insurance and Occupational Pensions Authority (EIOPA).

The reports, known as the Final Reports on Greenwashing, were released in response to a request by the European Commission in 2022. The Commission sought input from the ESAs regarding the risks associated with greenwashing in the financial sector, as well as the supervisory actions undertaken and the challenges faced in addressing these risks.

The Commission's request highlighted the rapid growth in demand for and supply of sustainable investment products, noting that this trend, while positive, also elevates the risk of greenwashing. Such practices could erode trust in sustainable finance and compromise the financial system’s ability to effectively channel private capital toward sustainable investments.

Following the Commission’s request, the ESAs initiated a call for evidence on greenwashing and released initial reports last year. These efforts were aimed at establishing a common understanding of greenwashing, identifying its key sources of risk within the financial sectors, and assisting market participants and regulators, including National Competent Authorities (NCAs), in mitigating these risks. The ESAs also developed a working definition of greenwashing, describing it as:

“A practice where 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. This practice may be misleading to consumers, investors, or other market participants.”

In their latest reports, which provide an update on current supervisory responses to greenwashing risks, the ESAs acknowledged the increased efforts by NCAs to monitor sustainability-related claims. However, they also emphasized the need for enhanced supervision moving forward and called for regulators to be equipped with more tools and responsibilities to effectively tackle greenwashing.

The EBA and EIOPA highlighted a significant rise in greenwashing incidents within their sectors. The EBA reported a 26% increase in the total number of alleged greenwashing cases in the EU in 2023 compared to the previous year. EIOPA noted that five member states’ national supervisors reported instances of greenwashing in 2024, up from three last year.

ESMA’s final report pointed out that while regulatory actions on greenwashing are increasing, NCAs are facing resource constraints, as well as challenges in accessing expertise and quality data. ESMA recommended priority actions such as increasing human resources, expertise, and supervisory tools at NCAs and integrating greenwashing risks more thoroughly into supervisory work programs. Additionally, ESMA urged the EU Commission to strengthen the mandates of NCAs and ESMA in certain areas and to ensure a legislative framework that supports NCAs’ access to necessary data.

Similarly, the EBA called for efforts to address challenges related to data, usability, consistency, and international interoperability of regulations. The EBA also recommended that banks implement measures at both the entity and product levels to ensure the accuracy and clarity of sustainability claims. Furthermore, the EBA emphasized the importance of finalizing existing and planned legislative and regulatory initiatives in the near term to support the robust implementation of new regulations.

EIOPA’s report included a set of principles for supervisors to consider when evaluating sustainability claims. These principles emphasize the need for claims to be accurate, precise, and representative of the provider’s and product’s profile, as well as being substantiated, up-to-date, and accessible to targeted stakeholders. EIOPA also proposed a series of recommendations to address challenges in greenwashing supervision, including resource constraints, a lack of sustainability-related data, complex regulatory frameworks, and the absence of a common approach to greenwashing supervision.

Overall, the reports underscore the necessity for enhanced regulatory measures and collaboration to address the increasing risks of greenwashing in the financial sector, ensuring the credibility and effectiveness of sustainable finance initiatives.