Last week, the Association of Financial Markets (AFME) in Europe released a report
revealing how the UK and EU’s approach to greenwashing differ in the financial market. The report analysed how financial institution regulators approach greenwashing mitigation, taking into account sustainability-related statements and laws in place, such
as the
UK’s anti-greenwashing rule.
The UK’s Financial Conduct Authority (FCA)
published official guidance on the anti-greenwashing rile in April 2024, to clarify what misleading sustainability claims warrant investigation.
The European Commission
published final reports on greenwashing in June 2024, to outline greenwashing risks and the supervision of sustainable finance policies. There are several different entities in the EU that address greenwashing in varying industries, such as the
European Banking Authority (EBA),
European Securities and Markets Authority (ESMA), and European Insurance and Occupational Pensions Authority (EIOPA).
How does the UK approach greenwashing?
In the UK, the
FCA’s anti-greenwashing rule applies to all FCA-regulated firms, which does not allow any misleading environmental claims in oral, visual, and written communications on products and services.
On these communications, the FCA directs companies to
Competition and Markets Authority (CMA) Guidance on environmental claims and
Advertising Standards Authority (ASA) Advertising Guidance. To summarise, both of these guidelines state that claims need to be honest, accurate, clear, substantiated, and not omit important information including the full life cycle of the product, or overexaggerate
and mislead environmental information.
A clear differentiation between the UK and EU guidelines on greenwashing is that the FCA has a clear anti-greenwashing rule that is a part of the ESG framework, which states that companies cannot make false, overstated, or misleading environmental claims.
How does the EU approach greenwashing?
The EBA addresses financial institutions such as banks, investment firms, payments providers. With regards to greenwashing, it provides guidance on marketing and commercial promotion, green loans, green mortgages, green bonds,
sustainability-linked loans and bonds, green securitisation, claims of current sustainability characteristics, forward looking commitments, and real-world impact in its final report on greenwashing. EBA regulation states that frameworks that fail to address
sustainability impacts, that violate
Green Claims Directive,
ESG disclosures, and transition plans will not be tolerated.
The ESMA addresses securities issuers, investment managers, investment service providers, and prevents greenwashing by outlining clear rules on advertisements, disclosures, prospectuses, and engagement activities. The ESMA states that miscommunication and
misconduct along these guidelines will be penalised.
In contrast to the UK, there are no clearly-outlined rules on greenwashing specifically from EU regulators, but they do outline greenwashing guidelines focused on specific issuers that clarify how greenwashing is not permitted.
Comparing and contrasting
The report compares FCA and EU definitions of greenwashing side by side, pointing out that the main difference is that the EU definition points out that greenwashing does not reflect the “sustainable profile of an entity” and this practice is misleading
to “investors, consumers, or other market participants”, the UK definition, however, is more broad and refers simply to misleading of a product or service, which can be misleading.
The FCA outlines how to mitigate greenwashing within the life cycle of a product, while the EU points to ESG risk management systems and conducting mapping exercises to avoid greenwashing. The EU guidance states that sustainable claims should be substantiated
and accurately represent the company, establish government and ESG data, and be a part of sustainable commitments, whereas the FCA published rules to stop greenwashing in communications focus mainly on how companies are communicating their sustainable practices
about their products and services.
The EU regulation explains how existing regulations serve to prevent greenwashing and addresses company statements and products and services; the regulation is broader because of their sustainable finance disclosure requirements. The consequences of failing
to comply with greenwashing guidance are investigations and fines from regulators, and quite significantly, damage to company reputation and loss of consumer trust.
However, both are very clear on not supporting misleading statements on sustainable practices which are not exclusive to the financial sector, and frameworks are in place: the UK’s
Sustainable Disclosure Requirements and EU’s
Sustainable Finance Disclosure Regulation.