Asset managers may need to tighten up their presentation of ESG labels or membership of net-zero alliances following new guidance from the EU’s financial markets watchdog.
The European Securities and Markets Authority (ESMA) has published a new thematic note on “clear, fair and not misleading” sustainability-related claims, with a focus on ESG credentials.
It applies to all non-regulatory communications, such as marketing materials and voluntary reporting and is designed to complement, rather than replace, existing regulatory disclosure requirements. There may be some overlap with the EU Sustainable Finance Disclosure Regulation (SFDR), however.
Julia Vergauwen, investment funds counsel at law firm Linklaters, explained that while the guidance does not create new laws, it does make clear what regulators expect in terms of how ESG-related information should be presented to investors.
“It [the guidance] clarifies certain provisions, along with how the regulator expects certain SFDR requirements to be complied with,” she told IPE.
She noted that firms may have to update disclosures twice in a short amount of time, as the European Commission is expected to propose revisions to SFDR later this year.
“It might create extra work, which will require additional resources if SFDR is going to be changed again soon,” said Vergauwen.
Claims about industry initiatives
ESMA’s guidance states that firms making sustainability-related claims, such as stating that a product is “green” or “ESG friendly”, must follow four clear principles: the claims must be accurate, accessible, substantiated and up to date.
It may require firms to update or elaborate existing investor communications, especially around participation in sustainability and net-zero initiatives, awards and credentials and the use of peer comparisons or ESG ratings, among others.
“We see managers often just saying they’re a participant in a net-zero initiative, but now they’ll need to explain what that means, the commitments involved, and whether data is self-reported or verified,” Vergauwen added.
The Net Zero Asset Managers initiative is currently suspended, after key members pulled out earlier this year due to political and legal pressure in the US, and this week HSBC became the latest bank to withdraw from the industry’s net-zero grouping.
Dos and Don’ts
In addition to setting out key principles for sustainability-related claims, the guidance sets out several dos and don’ts, illustrated by real-life examples based on observed market practices.
For example, the note encourages disclosing whether ESG credentials are based on self-reported data or verified by third parties, while discouraging the use of regulatory disclosures such as SFDR product-level disclosures as labels.
“For instance, when mentioning a product’s disclosures under the SFDR, don’t give the impression that SFDR designations are credentials or that they have been assigned by a third party (e.g. via colourful logos),” ESMA said in the note.
Lawyers at Rope & Grays said that with the guidance, ESMA “has taken another step in its ongoing mission to combat greenwashing within the financial services sector”.
“The practical do’s and don’ts provided by ESMA offer a clear indication of the regulatory expectation and managers should carefully review their materials against them (particularly in relation to ESG credentials for Article 6 funds and details of participation in industry initiatives).”
In a report on greenwashing last year, ESMA said the supervision of sustainability-related claims had become a priority for national supervisors but warned that they still faced constraints on their resources, as well as on their access to expertise and to good quality data.
The continued crackdown on greenwashing in financial services comes as legislative talks on the European Commission’s flagship anti-greenwashing law in the corporate space have been put on hold.
Negotiations over the proposed Green Claims Directive ended last month due to a difference of opinion between the co-legislators and with the Commission saying it would withdraw its proposal if the Council did not back down on an amendment to extend the legislation’s scope.
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