The European Securities and Markets Authority (ESMA) has warned investors not to “cherry-pick” their sustainability claims, and to stop conflating portfolio-level impacts with real-world ones.
In two thematic notes published this week, the supervisor provided informal guidance on making impact and transition-related claims, based on current market practices.
“Such claims may risk being misinterpreted and investors may be misled, regardless of whether or not this is the intention of the market participant,” it wrote, adding that “claims can be misleading in particular because of cherry-picking, exaggeration, omission, vagueness, inconsistency, lack of meaningful comparisons or thresholds, misleading imagery or sounds”.
ESMA advised market participants to “acquaint themselves” with the principles laid out in the two documents – which apply to oral and written communications that aren’t already covered by regulation – to avoid falling foul of its expectations on greenwashing.
Recommendations include ensuring that the terminology, images and sounds being used “are consistent with the sustainability profile of the entity or product” and that claims are substantiated with “clear and credible reasoning, facts and processes”.
On transition-related claims, ESMA advised investors not to report selectively on positive developments while omitting material delays or challenges, and not to talk about stewardship or engagement efforts without explaining how they support the stated transition ambition, including any escalation mechanisms.
The supervisor observed a lack of credible disclosures on the progress investors were making on their decarbonisation objectives.
“Information on whether progress remained on track, assumptions underpinning the reported progress, or the reasons for any deviation from the stated transition trajectory was often limited,” it said.
The guidance warned investors not to present their portfolio decarbonisation targets “in a way to suggest that portfolio decarbonisation equates to real-economy emissions reductions”.
ESMA made a similar point about claims relating to environmental and social impacts, saying there was a lot of “confusion” between the impacts achieved at portfolio level, and those generated for the underlying issuer or asset.
“Failure to distinguish clearly between investee impact and investor impact may result in misleading claims,” it stated.
The guidance comes just weeks after the Empowering Consumers for the Green Transition Directive (ECGT) came into application across the European Union.
ECGT is arguably Europe’s most ambitious anti-greenwashing regime, and will ban any vague or questionable environmental claims being made with the intention of selling products – including investment funds and pensions – to consumers.
