ESAs Propose Enhanced Disclosure Rules to Combat Greenwashing in Financial Products

The European Supervisory Authorities (ESAs) have proposed new categories for financial products under the Sustainable Finance Disclosure Regulation (SFDR) to address greenwashing and improve clarity for investors. The new categories, “Sustainable” and “Transition,” are designed to provide clear criteria for sustainable investments and enhance consumer protection.

The ESAs, which include the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA), and the European Insurance and Occupational Pensions Authority (EIOPA), have responded to the European Commission’s review of the SFDR framework. This review aims to harmonize transparency rules for financial market participants regarding sustainability risks and impacts.

Currently, the SFDR classifies funds under ‘Article 8’ (promoting environmental or social characteristics) and ‘Article 9’ (having sustainable investment as an objective). However, these classifications have unintentionally become de-facto sustainability labels, potentially leading to greenwashing.

The proposed updates include the introduction of two new categories:

1. Sustainable: This category will encompass products investing in environmentally or socially sustainable activities that meet minimum thresholds, such as EU Taxonomy alignment.
2. Transition: This category will cover products aiming to become sustainable over time.

“The ESAs are in favour of the introduction of regulatory product categories that would help address the greenwashing problems arising from the misuse of the disclosures under Article 8 and Article 9 of the SFDR and generate clarity for investors, in particular retail investors,” the ESAs stated.

Additionally, a new sustainability indicator will be introduced to grade financial products, simplifying complex sustainability information for consumers. Enhanced disclosure requirements will be implemented for products with sustainability features that don’t qualify for the new categories, including restrictions on using ESG-related terms in marketing. Products without sustainability features must include disclaimers and minimal disclosure on negative impacts.

The ESAs also noted the confusion caused by parallel concepts of ‘sustainable investment’ under SFDR and the EU Taxonomy. They suggest using the Taxonomy as a science-based reference for measuring sustainability performance.

The European sustainable investment association Eurosif supports these proposals but emphasizes the need for strict safeguards against greenwashing for products using ESG terms without fitting into the new categories. “To further prevent greenwashing, and should the ESAs’ suggested classification be implemented, this should be allowed only as long as there are strict safeguards, including the demonstration that these products do not harm sustainability objectives,” said Eurosif.

The ESAs’ assessment is a step towards refining the SFDR framework, aiming for clearer, more reliable sustainability disclosures and categories, ultimately benefiting both consumers and the environment.