The Misleading Qualities of Greenwashing 

ESG disclosures play a pivotal role in the transition to a green-er economy in Europe. This is reinstated by ESMA in its strategy programme for the period 2023/2028, with ESG disclosures becoming one of the hottest supervisory priorities. The increasing momentum gathering around the market for ESG related investment products happens at a particular junction in time when other forces drive concurrent plans to address similar concerns in the broader European capital markets. The new retail investment strategy plan of the European Commission, amongst the others, aims at fostering participation of retail investors to European capital markets, with a package of new measures to strengthen existing investor protection rules across various piece of existing legislation.  

ESMA is clearly faced with the high expectations of all the European stakeholders involved to succeed in the mission to assist with the creation of a trusted and reliable market environment for retail investors, including the market for ESG related investment products.   

 In this context, back in May 2022 the European Commission requested the ESAs to provide input on the definition of greenwashing and the risks that greenwashing poses to both investors and financial markets. Packed with actionable intelligence, the report of the ESAs identifies, amongst other things, the main misleading qualities of greenwashing in a highly detailed manner and based on the two main categories of provision or omission of information.  

 Get in touch here with your contacts at Veneziano & Partners to see how we can help with the misleading qualities of greenwashing. 

 Greenwashing Risks and Core Characteristics 

 Before tackling the main misleading qualities of greenwashing, in details in their qualification of provision and omission of information, it is noteworthy to mention an important point contained in the ESAs report for what concerns the concept of greenwashing risks.  

 A distinction is made between greenwashing risks and greenwashing-related financial risks. The first type of risk is mainly investor centric. It refers to the risk posed by misleading sustainability claims on investors and in relation to their investment decisions. The second more broadly refers to the financial risks that misleading sustainability claims might pose on financial markets, investors and entities. The report also highlights how greenwashing can manifest itself in a variety of different ways, levels and stages, Both of the business cycle and the related financial value chain. To provide the broadest prevention powers and be able to capture each and any instance of greenwashing, the ESAs argue that greenwashing can occur also in instances where there is no immediate damage to individual consumers or else no unfair competitive advantage is obtained.  

 This is a very broad categorisation for greenwashing and broader than necessary in our view. It could create complications in practical terms and hinder some of the remedies available to fight greenwashing. When shifting from prevention to enforcement, divorcing greenwashing from an actual damage for investors could create situations where it becomes difficult to pursue greenwashing under fraud, for instance, where an element of damage is indeed required.  

 Provision and Omission of Information 

 The ESAs report puts forward what is perceived to be the common understanding on greenwashing. 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 can be misleading to consumers, investors, or other market participants. Same as any other misleading claim – continues the ESAs report – claims of sustainability can be misleading either because information relevant to the decision-making process of investors is omitted or else false information is provided.   

 The so-called greenwashing misleading qualities are the qualities through which a claim can mislead investors or consumers, organised under the two main brackets of omission and provision of information as follows: 

Misleading through provision of information	Misleading through omission of information
Empty claims	Selective disclosure/cherry-picking
Inconsistency	Omission or lack of disclosure
Irrelevance	Vagueness or ambiguity
Outright lie	Lack of fair and meaningful comparisons, thresholds and/or underlying assumptions
Suggestive non-textual imagery and sounds	No proof
Suggestive use of ESG related terminology	Outdated information

 The premise contained in the ESAs report is that the above list of misleading qualities of greenwashing is not exhaustive. Moreover, one sustainability related claim can trigger more than one of the above-mentioned qualities. On average, according to the ESAs, cherry-picking, omission, ambiguity, empty claims, misleading use of ESG terminology and irrelevance are seen as the most widespread misleading qualities of greenwashing. The so-called cherry-picking or hidden trade-off seems to be the most dangerously common out of the misleading qualities of greenwashing. This practice consists of an approach of selecting disclosure, where a product is purported as sustainable based on a very limited set of attributes without taking into account the entire spectrum of the characteristics of the product, which may suggest otherwise in terms of its claim of sustainability.  

 Conclusion 

 There is more to the ESAs report that we have been able to cover so far. Including an analysis per sector of the main areas that are at risk of greenwashing. This report and its findings provide the answer to many of the unresolved questions that anyone grappling with forming and disclosing their ESG identity had in mind. By defining greenwashing, its qualities, the actors and the areas that are most at risk, the ESAs report offers many actionable points to guide financial market participants in better articulating their sustainability message going forward.   

 Get in touch here with your contacts at Veneziano & Partners to see how we can help with the misleading qualities of greenwashing.