ESMA note underlines greenwashing focus as financial firms urged to be vigilant

Dr Jan Saalfrank, investment funds specialist at Pinsent Masons, was commenting following the latest step in ESMA’s ongoing efforts to combat greenwashing. While the notes are educational in nature and do not impose new regulatory or reporting obligations, they aim to clarify ESMA’s expectations on how sustainability claims should be communicated in financial markets.

The initiative is part of ESMA’s broader strategy to promote transparency and integrity in sustainable finance. As ESG investing continues to grow in popularity, concerns have mounted over the risk of misleading or exaggerated claims – commonly referred to as greenwashing – that can misinform investors and undermine trust in sustainable financial products.

Saalfrank said: “Greenwashing remains on the important agenda of ESMA, with the latest update a clear signal to the market. The recent thematic note clearly emphasises ESMA’s expectations on the formulation of sustainability claims, offering good guidance for market participants.”

The first thematic note outlines four principles that financial market participants should follow when making sustainability-related claims: they must be clear, fair, not misleading, and substantiated. These principles apply to all non-regulatory communications, including marketing materials, websites and social media posts, and are designed to ensure that investors receive accurate and balanced information.

According to ESMA, misleading claims can take many forms, including ‘cherry-picking’ data, exaggerating achievements, omitting relevant context, or using vague and inconsistent language. The note also highlights the importance of aligning ESG terminology and visual elements – such as labels, awards and imagery – with the actual sustainability profile of the product or entity being promoted.

The first note zeroes in on ESG credentials, such as sustainability labels, certifications and awards, which are frequently used in retail-facing communications. ESMA warns that while these credentials can help investors identify sustainable products, they can also be misused to create a false impression of environmental or social impact.

To illustrate its guidance, ESMA includes examples of both good and poor practices observed in the market. For instance, it praises firms that provide transparent explanations of what a sustainability label entails and how it was obtained. Conversely, it criticises the use of vague or unverifiable claims, such as “eco-friendly” or “green,” without supporting evidence.

ESMA plans to release additional thematic notes in the coming months, each addressing different aspects of sustainability-related communications. The notes are also designed to complement existing regulatory disclosures, such as those required under the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.

“The clear cut ‘dos’ and don’ts’ contained in the note give stakeholders great guidance to better frame their ESG communications. With more notes to follow, the market can expect further guidance, which is always welcome in the ESG universe,” said Saalfrank.