Greenwashing: now defined, and upcoming regulatory enhancements

15 June 2023

On 31 May, the European Supervisory Authorities (ESAs) published, through ESMA, a Progress Report on Greenwashing. The ESAs’ publication is important because it defines greenwashing, displays the regulators’ intention to enforce on sustainability-related matters, and outlines the areas in which the ESAs believe that current regulations might need to change.

Background and purpose of the Progress Report

The Progress Report emerges in response to a request from the European Commission (EC) in May 2022 for the ESA’s input on “greenwashing risks and the supervision of sustainable finance policies”. The call for input asked for help with a definition of greenwashing, understanding the risks posed by greenwashing for the financial sector, the implementation of policies to prevent greenwashing, and potential improvements to EU regulations. ESMA also identified the need to address greenwashing as one of its priorities in its Sustainable Finance Roadmap 2022-2024.

The Progress Report details the ESA’s preliminary results in relation to the EC’s request. A final report is expected by May 2024 which will outline the ESA’s final recommendations, including possible changes to the EU regulatory framework.

Summary of the Progress Report

The Progress Report aims to support a better understanding of greenwashing and to assess which areas of the sustainable investment value chain (SIVC) are more exposed to, or may amplify, greenwashing risks. The ESAs introduce a common high-level understanding of greenwashing (see below), noting that greenwashing appears to result from multiple inter-related drivers and poses a systemic risk to the EU financial markets ecosystem.

Following a cross-cutting analysis, the Progress Report focuses on the following four sectors, outlining for each sector the high-risk areas, underlying drivers of misleading sustainability claims, and possible remediation actions: issuers, investment managers, benchmark administrators, and investment services providers. Some of the notable areas of high risk include:  

  • misleading claims on “impact”, e.g. impact reports implying an ESG metric is the direct result of a fund’s strategy, when it might sometimes just be the result of the intrinsic characteristics of the investable universe or the fund’s targeted asset classes;
  • misleading claims about an ESG strategy/characteristic/objective, including confusion between claims about ESG processes being implemented and actual progress/ESG results being achieved;
  • misleading claims about engagement with investee companies, including unsubstantiated (empty) engagement strategies and lack of important details about the progress of engagement (e.g. buy/sell decisions based on engagement specific outcomes);
  • lack of sufficient governance procedures around ESG, e.g. not having tracking systems in place to ensure compliance with ESG policies;
  • the “misuse” by market participants of SFDR as a labelling regime (which the ESAs note should be discouraged), and the misleading practice of referencing Article 8 or 9 SFDR as a “classification” or earned label; and
  • poor transparency of methodologies regarding the use and processing of ESG data as part of investment selection and benchmark construction processes and reporting.

Possible remediation actions proposed by the ESAs include additional clarification on best practices, the introduction of a product labelling regime, changes to existing legislation (notably BMR and SFDR), and the introduction of new regimes such as an EU-level stewardship code (leveraging off existing stewardship codes such as that in the UK).

ESMA is in the process of expanding its monitoring framework to better identify and address greenwashing risks, including assessing the usefulness of different datasets and tools (such as AI) to operationalise its monitoring.

Definition of greenwashing

The ESAs have developed the following common high-level understanding of greenwashing:

“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.”

It is clear from the ESA’s definition that greenwashing can be intentional or inadvertent, which is in contrast to some arguments from market participants that unintentionally misleading a consumer in respect of sustainability-related claims should not constitute greenwashing. The Progress Report is also clear that greenwashing does not require investors being actually harmed.

Sustainability-related claims can relate to any aspect of an entity or product, including governance, strategy, objectives, targets, metrics, and performance. Firms should therefore be aware that all aspects of their disclosures and marketing materials bear a risk of greenwashing to the extent that sustainability-related claims are made, and regardless of whether specific ESG requirements apply.

Pressure on reform of SFDR

The publication of the Progress Report makes it more likely that there will be fundamental changes to the SFDR, citing several self-identified shortcomings of the regime in addressing (and potentially exacerbating) greenwashing risk. The EC is considering whether to launch a review of SFDR perhaps later this year (the SFDR level 1 legislation required an “evaluation” by the end of 2022, which did not occur).  However, the planned May 2024 publication of the ESA’s final recommendations on greenwashing suggests that SFDR reforms might happen on a slower timescale next year.

In tandem: Regulatory advances on greenwashing in the UK

The increasing focus on greenwashing is not limited to the EU: notably, the FCA intends to introduce an anti-greenwashing rule as the first component of its Sustainability Disclosure Requirements (SDR). The FCA has delayed the introduction of the SDRs from June 2023 to give it time to address feedback received in response to the publication of its draft rules. Consequently, the UK’s anti-greenwashing rule is expected to take effect shortly after the publication of the FCA’s final rules towards the end of 2023.

In addition, the FCA is reportedly investigating the sustainability-linked loan (SLL) market due to a concern that sustainability targets may be too lax, making it easy for borrowers to achieve a discounted interest rate while achieving little positive environmental impact. The Loan Market Association released updated guidance in February identifying the three most significant greenwashing risks in SLLs, (i) the use of sustainability targets which are immaterial, (ii) sustainability targets which are not sufficiently meaningful or ambitious and (iii) inaccurate or insufficient monitoring, measuring, benchmarking of performance against the sustainability targets. The UK regulator is also beginning to consider how issuers of green bonds explain their issuance in relation to their broader company strategy.


The Progress Report contains a comprehensive series of examples of sustainability-related claims that may constitute greenwashing and outlines common high-risk areas affecting all sectors covered in the report, notably relating to ESG strategy, objectives and characteristics, presentation of ESG performance and impact.  Prudent firms may wish to review their existing sustainability-related claims and marketing collateral in light of the practical examples and contents of the report (and ahead of any enhanced monitoring and supervision) to ensure they are justifiable, evidencable, and clearly and fairly reflect the underlying sustainability profile of the firm and its products or services. Investors may look to the Progress Report to back-test existing investment claims and evaluate future investment opportunities – and in light of the "no harm required" view, consider whether the ECs have opened up an additional cause of action should things go south.

This article was authored by Harriet Miller, Lora Froud, Gavin Haran, Tiffany Cox, Emma Garnham and Rachel Richardson.