Increased supervisory actions and better access to data and other resources will be required to address growing greenwashing risks at banks, investment firms and insurance companies, according to new reports released by Europe’s three primary financial regulatory agencies, the European Supervisory Authorities (ESAs).

The ESAs include The European Securities and Markets Authority (ESMA), The European Banking Authority (EBA), and The European Insurance and Occupational Pensions Authority (EIOPA).

The new publications are the Final Reports on Greenwashing released by the ESAs, following a request in 2022 by the European Commission for input from the ESAs on greenwashing and its related risks in the financial sector, and on the supervisory actions taken and challenges faced to address those risks.

The Commission’s request highlighted the rapid growth in demand for and offerings of sustainable investment products, and noted that while it views this growth as a “very positive trend,” it also raised the risk of greenwashing, warning that such practices could undermine trust in sustainable finance, and “the capacity of the financial system as a whole to channel private capital to sustainable investments.”

The ESAs issued a call for evidence on greenwashing following the Commission’s request, and issued their initial reports last year, to form a common understanding of greenwashing and identifying key sources of greenwashing risk in their respective sectors to support market participants and regulators, including the National Competent Authorities (NCAs) in addressing these risks. The ESAs also established 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 the new reports, which provide an update on the current supervisory responses to greenwashing risks, the ESAs noted increased steps already underway by the NCAs to supervise sustainability-related claims, but also highlighted a need for enhanced supervision going forward, and called for regulators to be given increased tools and responsibilities to address greenwashing.

Both the EBA and EIOPA noted a significant increase in greenwashing incidents in their respective sectors, with the EBA reporting 26% growth in the total number of alleged cases in the EU in 2023 compared to the prior year, and EIOPA reporting that five member states’ national supervisors have reported instances of greenwashing in 2024, compared to only three last year.

In its final report, ESMA noted that while regulators are stepping up action on greenwashing, the NCAs are facing “constraints on their resources, as well as on their access to expertise and to good quality data.” Priority actions recommended by ESMA included increasing human resources, expertise and supervisory tools at NCAs, as well as further embedding greenwashing risks in their respective supervisory work programmes. ESMA also called on the EU Commission to reinforce NCAs’ and ESMA’s mandates in certain areas, and to ensure a legislative framework supporting NCAs’ access to data.

Similarly, the EBA also called for efforts aimed at addressing challenges related to data, in addition to usability, consistency, and international interoperability of regulations. The EBA also made recommendations for banks to take measures at the entity and product level to ensure the accuracy and clarity of sustainability claims. Additionally, the EBA’s recommendations included giving priority to finalizing existing and planned legislative and regulatory initiatives in the near-term, and to support “a robust implementation of the full set of new regulations.”

EIOPA’s report included a series of principles for supervisors to consider when evaluating sustainability claims, including ensuring that the claims are accurate, precise and fairly represent the provider’s and product’s profile, and that the claims can be substantiated, up-to-date, and accessible to targeted stakeholders. EIOPA’s also set out a series of recommendations to address challenges in the supervision of greenwashing such as resource constraints, a lack of sustainability-related data, complex regulatory frameworks and a lack of common approach to greenwashing supervision.

Click here to access the ESMA, EBA and EIOPA reports.