Comment

Greenwashing risk

The CSA follows recent supervisory work that ESMA, together with the other European Supervisory Authorities (ESAs), has been undertaking on the risks of greenwashing in the financial markets, and may well be a precursor to additional enforcement activity in this space. EU firms should bear in mind supervisory guidance from ESMA issued in May 2022 on the integration of sustainability risks and disclosures for asset management when considering and quantifying greenwashing risk for these purposes. This supervisory guidance set out in particular a non-exhaustive list of reasons for which NCAs may choose to take administrative measures (including enforcement action) to combat greenwashing:

• Legally required disclosures not made
• “Severely misleading” disclosures (for example, when consistency checks would highlight a situation where there is a significant discrepancy between what the fund actually invests in and what has been disclosed to investors in pre-contractual disclosure documentation)
• Circumstances in which sustainability risks have not been integrated throughout the organization despite an appropriate period of time after entry into force of regulatory requirements to do so
• Periodic disclosures that do not match or fulfill characteristics or objectives in fund documentation
• Situations where products that have been disclosed or labeled in some way as sustainable do not comply with relevant regulatory criteria

We expect that ESMA may refer to its guidance on greenwashing and enforcement action during the course of the CSA.

More recently, following the launch of a joint call for evidence on greenwashing in November 2022, the ESAs issued progress reports in June 2023 identifying greenwashing risk areas, causes and possible remediation actions across the sectors they regulate. In their progress reports, the ESAs together put forward a common high-level understanding of greenwashing 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. For investment management specifically, ESMA’s progress report identified the highest risk areas as: 

• Impact claims
• Statements about engagement with investee companies
• Statements about a fund or asset manager’s ESG strategy and ESG credentials (such as ESG labels, ESG ratings or ESG certifications)
• Fund names
• Claims about governance around ESG

ESMA intends to use preliminary findings from the CSA on the identification of greenwashing risks at entity and product level to provide input into its final report on greenwashing. We may then see some proposed changes to the EU regulatory framework, but in the meantime, the above list forms a helpful set of indicators around where regulators see the greatest risk.

Other points to note

• There are areas of the CSA which remain uncertain from ESMA’s announcement. For example, it is unclear what ESMA means by “supervised asset managers” – there is a question as to whether this is limited to, for example, EU AIFMs and UCITS management companies, or if it extends to non-EU fund managers marketing to EU investors pursuant to a national private placement regime. Our expectation, however, is that similar expectations will be applied across EU headquartered managers and non-EU managers marketing funds into the EU (at least at product level).
• Practice currently appears to vary between NCAs in terms of the scrutiny applied to managers registering Article 8 and 9 funds, with the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) and the Central Bank of Ireland (CBI) in particular having done a significant amount of thinking around this. ESMA may use the CSA as an opportunity to roll out these best practices across other Member States. 
• ESMA may also use the CSA as an opportunity to scrutinize whether Article 8 and 9 funds are in fact conforming to required or anticipated standards. It is not clear whether standards will become more restrictive over time as a result of this scrutiny, but there does appear to be increasing thought given to the nature of individual investments within portfolios of assets. For example, in their joint consultation on the review of SFDR Delegated Regulation, the ESAs note that “evidence from investigative work by NGOs shows that a significant share of Article 9 SFDR financial products have exposures to fossil fuels, and in particular to coal activities”. 
• The scope of the CSA appears to be particularly focused on funds, and does not explicitly mention products such as single managed accounts (regulated under the MiFID II regime), which may instead be picked up through a parallel CSA on the application of MiFID II disclosure rules with regard to ESG-focused marketing communications. Indeed, looking more widely at ESMA’s recent supervisory work on sustainability, it is clear that asset managers are at the forefront of regulatory thinking and potentially also enforcement risk relating to ESG regulation, with ESMA looking to strengthen convergence around supervisory and enforcement practice.