Towards promoting sustainable finance disclosure: are ESMA’s hands tied? DRAFT

By Leo, Liza and Matteo

Climate change poses risks for virtually all sectors within global economies. These adverse effects extend themselves to the financial sector as well: global warming will negatively impact the stability of financial markets. Accordingly, the European Securities and Markets Authority (“ESMA“) has committed itself to contribute to a more sustainable financial framework. Amongst its most important priorities ESMA has identified the aim to tackle ‘greenwashing’, likewise the objective of the new Sustainable Finance Disclosure Regulation 2019/2088 (“SFDR”) by the European Commission. This blog post will set forth how the tasks conferred to ESMA under the SFDR will likely prove themselves to be insufficient. As the SFDR does not provide ESMA with any enforcement powers, the authorities’ hands appear to be tied when addressing misleading sustainability claims. For the time being, national competent authorities (“NCAs”) might be able to come to the rescue.


Financial greenwashing: how making ‘dirty’ look ‘clean’ is harming the environment

First coined by the ecologist Jay Westerveld in the 80’s, the term greenwashing refers to companies presenting their business activities as more sustainable than they actually are. As public concern about climate change has increased, the practice has gained more and more traction.


Although greenwashing initially originated in the consumer goods industry, the phenomenon has consolidated itself in the financial sector as well. The increased demand for sustainable products has led financial operators to capitalise on the ‘green’ inclinations of their investors. This has resulted in a growing number of companies making unsubstantiated claims about their products. As a result, investors have come to buy financial assets that only appear climate-friendly. In reality, they have (unknowingly) been abandoning their sustainable investment ideologies. Most importantly, greenwashing has started to hinder the financial sector in its pursuit to effectively address climate change.

 The EU Sustainable Finance Framework: information disclosure as a building block

The overall objective of a more sustainable financial framework was first enshrined in the Paris Agreement of 2016 and the UN 2030 Agenda for Sustainable Development. Both policy documents highlight the need for a more sustainable financial system and have led the European Union to increase its efforts to ‘green’ the financial system. Keen to contribute to climate change mitigation, the EU has accordingly recognized tackling greenwashing as one of its top priorities.


In a broader effort to increase the supply and demand of green capital, the European Commission launched the 2018 Action Plan “Financing Sustainable Growth”. The plan consists of three building blocks: (1) a taxonomy of sustainable activities, (2) disclosure requirements for financial and non-financial companies and (3) investment tools such as benchmarks, standards and labels.

Most relevant in the context of greenwashing is the second building block. This element of the plan seeks to provide investors with the necessary information to make informed and sustainable decisions on the market. Disclosure requirements relate to both the environmental and societal impact of a firm, as well as to the business and financial risks it faces due to sustainability exposures. Hence, the European framework requires financial operators not only to consider the impact that sustainability issues have on their own business, but also on the environment in general.

Source: Strategy for Financing the Transition to a Sustainable Economy

 Cracking down on greenwashing: ESMA and the Sustainable Finance Disclosure Regulation

A key contributor to the Commission’s second building block has been the Sustainable Finance Disclosure Regulation 2019/2088. The provisions of the SFDR entered into force in 2021 and impose extensive sustainability disclosure requirements on European banks, investment funds, insurers and asset managers. For this purpose, the SFDR defines various categories of financial products. These categories vary from initiatives without any climate-friendly considerations, to those with specified environmental objectives. Overall, the regulation aims to increase transparency, maintain a level playing field within the EU and address the issue of greenwashing.


The SFDR highlights an important task for ESMA. As the authority is one of the three European Supervisory Authorities (“ESAs”), it operates within the ESA Joint Committee. This Joint Committee received a mandate to review and revise the Regulatory Technical Standards (“RTS”) under the SFDR. In February 2021, the ESAs accordingly presented their final report on draft RTS regarding the content, methodologies and presentation of sustainability-related disclosures. Currently, the Joint Committee is still working on finalizing its draft RTS. However, the ESAs informed the Commission that they will issue a Final Report under their mandate before November 2023.


The road ahead: do ESMA’s powers suffice?

At present, the SFDR does not provide ESMA with tools to enforce against the risk of greenwashing. As the supervision and enforcement of the SFDR is a task for NCAs, ESMA is bound by a shared-enforcement system. Whilst the authority can establish RTS under the SFDR, only NCAs can sanction financial operators in case of non-compliance. This could lead to an ineffective approach towards greenwashing when NCAs don’t equally enforce against this misconduct. Consequently, it has been argued that ESMA should be appointed as the sole supervisor and enforcer of the SFDR. With one central supervisor, chances of achieving regulatory harmonization could increase. However, central supervision would still face some legal challenges under the non-delegation doctrine.

In its 2014 New Delegation Doctrine the Court of Justice of the European Union provided for the possibility to establish EU-agencies that can take legally-binding decisions. However, the content of such decisions needs to be specific. Moreover, precise conditions and criteria must limit the authorities’ discretion and the legally-binding measures must allow for judicial review. Compared to the Meroni Doctrine, the New Delegation Doctrine seems to incentivise the “agentification” process within the EU. Still, ESMA cannot be delegated full discretionary powers to take legally-binding measures in order to address greenwashing.


Regardless of future developments, it is advisable that NCAs cooperate. Sharing best practices could contribute to a more uniform approach when addressing greenwashing practices. As it currently stands, ESMA’s ‘enforcing’ hands seem to be tied.  For now, NCAs could come to the rescue.

Author: Student posts

This blog post is written by Master students at Utrecht University.

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