ESG – Environmental, Social and Governance

How UK and EU regulators plan to hold financial service providers accountable for greenwashing

Published on 12th Dec 2023

What can providers do to mitigate the risk of accusations of greenwashing as regulatory focus on ESG-related claims tightens?

Business planning meeting, photo of people's hands holding pens and going over papers

There have been significant recent supervisory developments in the UK and EU regarding the risks of greenwashing in the financial services sector. What are some of these developments and what can financial service providers do to mitigate the risk of accusations of greenwashing?

EU supervisory developments

Although there is no overarching legal definition of the term "greenwashing", in the financial services sector the three European Supervisory Authorities (ESAs) have agreed an understanding of greenwashing which is broad and far-reaching:

"Greenwashing is 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."


What is immediately noticeable is that this wording is agnostic as to whether there has been any intent to mislead or even any negligence involved.

Accusations of greenwashing may arise where firms have acted in good faith but have simply been unaware they did not meet supervisors' increasing and evolving expectations. (For an interesting analogy in another sector and jurisdiction, the Advertising Standards Authority in the UK has taken action against companies making inaccurate environmental claims that are considered disproportionate to the environmental impact of their overall business activities.)

Each ESA recently published a report assessing the greenwashing risks applicable to market participants across banking, insurance and pensions and financial markets providing input to the European Commission on:

  • a common understanding of the key features of greenwashing;
  • the most relevant types of greenwashing, its occurrences and complaints related to it;
  • the risks that greenwashing poses to financial sector entities, investors and consumers;
  • supervisory practices, experiences and capacities, including tools to monitor greenwashing; and
  • gaps, inconsistencies and problems in the current legislative framework.
EBA progress report

The European Banking Authority (EBA) report provides an overview of greenwashing relating to banks, investment firms and payment service providers.

Pledges made about future ESG performance, ESG strategy and objectives, ESG labels and certificates are identified as the areas most at risk of greenwashing.

EIOPA progress report

The European Insurance and Occupational Pensions Authority (EIOPA) found that greenwashing risks can arise in all stages of the insurance and pension lifecycles, and that unsubstantiated green claims may provide harm to consumers who buy products not aligned with their sustainability goals, as well as a risk of insurance and pension providers themselves being accused of greenwashing.

ESMA Progress Report

The European Securities and Markets Authority (ESMA) found greenwashing risks prevalent in all key aspects of the sustainability profile of a product or entity – from governance aspects to sustainability strategy, targets and metrics or claims about impact.

Lessons learned

Having received and considered the requested reports, on 14 September 2023, the European Commission consulted on a "comprehensive assessment" of the Sustainable Finance Disclosure Regulation (SFDR) stating that "the regulation is, however, not entirely working as intended". (See our International Funds Legal Update for further details on the SFDR review.)

ESMA's scrutiny of ESG names in the fund industry

While the European Commission is consulting on the future sustainability regime, ESMA is focusing on supervision of the current regime. Tackling greenwashing is a key priority in its Strategy on Sustainable Finance.

On 2 October 2023, it published an article on ESG names and claims. ESMA used natural language processing techniques to examine the use of ESG-related terminology in fund documentation. This exercise enabled it to scrutinise over 100,000 documents spanning a wide range of investment strategies across 36,000 funds.

The article provides documentation underpinning ESMA's increasing greenwashing concerns by showing an increase in fund names using ESG or sustainability-related terms combined with inadequate disclosures in fund documentation.

The findings from this exercise will be used as leverage for more greenwashing supervision and enforcement from national regulators.

UK regulator's work on greenwashing

In the UK, the Financial Conduct Authority (FCA) has also been active. It recently published its findings from a multi-firm review on how authorised fund managers (AFMs) are complying with regulatory requirements regarding the design, delivery and disclosure of ESG and sustainable investment funds.

This was a follow-up to the regulator's Dear AFM Chair letter from July 2021, which includes the "Guiding Principles" AFMs must follow in this area.

While the FCA felt that AFMs generally demonstrated good intent to embed the guiding principles and that there was evidence of good practice, it found that the principles had not been fully embedded. Key information about ESG and sustainable investment funds was difficult to identify, and some disclosures did not contain important information that would have enabled investors to make fully informed choices about investment products.

The FCA has tasked AFMs with assessing how they are complying with ESG and sustainability requirements, especially in relation to disclosure material, and will continue to supervise this area.

In short, the FCA stated that, in relation to their ESG and sustainable investment funds, AFMs should:

  • Identify and address any shortcomings in the design, delivery and disclosure of their funds, and ensure they are not conducting their operations in a way that causes harm to consumers.
  • Review the FCA's detailed findings that explain how to comply with each of the principles relating to design, delivery and disclosure.
  • Consider the potential impact of the new rules on sustainable disclosure requirements and investment labels on their firm and investment products and take necessary actions to comply when the new rules come into force.

The FCA's new sustainable finance disclosure requirements

On 28 November 2023, the FCA published its much-anticipated rules on the Sustainability Disclosure Requirements (SDR) and investment labels regime.

The rules include three new chapters to the ESG sourcebook introducing a package of measures to inform and protect consumers, enhance competition and improve trust in the market for sustainable investment products. For further detail, read our Insight on the new rules.

The regulator is also consulting on associated guidance to the new anti-greenwashing rule coming into force on 31 May 2024.

Osborne Clarke comment

Supervision is ramping up in both the EU and the UK, and regulators are deploying new tools to trawl through documents looking for ESG and sustainability claims. Firms should be vigilant and active in managing greenwashing risks. Understanding and meeting evolving regulatory standards and expectations is key to avoid penalties, maintain trust with investors, and avoid reputational damage.

Firms should ensure that all statements accurately reflect the true ESG and sustainability profile of each product and service and consider greenwashing in a broad perspective. Firms should stay informed about regulatory developments and scrutiny on greenwashing and adapt their practices accordingly, for example by conducting a thorough assessment of ESG and sustainability-related risks – being required to substantiate claims on demand will concentrate minds!

The ESAs' broad understanding of greenwashing is likely to affect how EU regulators supervise the provision of financial services. Accusations of greenwashing may catch unwary financial service providers off-guard. While the SFDR reforms in the EU will take years to implement, there are no signs of regulatory forbearance.

UK fund managers should follow up on the three tasks set by the FCA and document the steps they have taken to do so, in addition to implementing any needed changes due to the new SDR rules.

To find out more, see our Decarbonisation topic page, and sign up for our new international ESG Knowledge Update, for a round-up of legal, regulatory and market news.

This Insight was written with the assistance of Michelle Tong, paralegal at Osborne Clarke.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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