Greenwashing attracts the attention of regulators and the market itself

The sustainable finance model projected by European Union (EU) policies is becoming increasingly relevant, as well as more complex and technical. At this time, when ESG (environmental, social and governance) regulation and methodologies are in the development phase, and the need for technical expertise is increasing, the phenomenon known as greenwashing has attracted the attention of supervisors, regulators and the financial sector itself.

Greenwashing (in an attempt to translate this expression into our language we could resort to 'ecoblanqueo' [eco-whitewashing] or even 'ecopostureo' [eco-posturing] if we opt for a more colloquial term, although very expressive of what we are trying to conceptualise) is perceived as one of the greatest risks to investor confidence and, therefore, as a threat to the fulfilment of the common objective of evolving the EU productive system towards a long-term sustainable model.

The European Securities and Markets Authority has defined the concept as the set of market practices on sustainability disclosure that do not adequately reflect the sustainability risks and impacts associated with an issuer or financial instrument. This is a definition that may seem simple at first glance, but which, once it is examined in greater depth, turns out to be extremely complex. Indeed, despite what might be deduced from the term itself (greenwashing), it does not appear to be limited to environmental factors, but aims to encompass social (social-washing) and governance (governance-washing) factors as well. Other elements that are currently under discussion are those relating to the intentional element (can unintentional behaviour be reproached as greenwashing?); the different role, and consequently level of responsibility, to be attributed to the different stakeholders; or the treatment to be given to the wide variety of casuistry that may be encountered along the value chain. Clarification of these uncertainties is a matter of urgency.

Finresp (Spanish Centre for Responsible and Sustainable Finance) is concerned by this debate. Finresp was created in 2019 as a federation of Spanish financial associations (AEB, CECA, UNACC, Unespa and Inverco) to promote sustainability in the economic fabric of our country. Given our size and strategic importance within the economic system, our ESG commitment and reputational impact, we believe that we must position ourselves and constructively contribute our vision.

The European Commission has already defined its expectations regarding the role of supervisory bodies in the identification, prevention, investigation, sanctioning and remediation of greenwashing. In May 2022 it requested input from the three European Supervisory Authorities (ESA). In November, these authorities launched a call for evidence to all interested stakeholders with the aim of improving the understanding of the concept and identifying possible casuistry. Once this process is completed, a report is expected to be published in May 2023.

Contributing to this debate, Finresp considers that having a consensual, understandable definition based on scientific criteria that clarifies which investments can be considered sustainable is an essential premise for the creation of a framework and rules of the game that provide legal certainty, credibility and transparency.

An initial difficulty in this regard has emerged as a result of the extensive regulatory agenda that has been set in recent years (and which is still far from being completed). The concept of sustainability (or, more precisely, sustainable investment) has been addressed from different angles: transparency, the marketing of products or reporting, among others. In each of these cases, different premises have been used as a starting point, which has resulted in inevitable nuances in definitions and regulatory treatments, which are currently preventing a unified and fully coherent concept of the phenomenon. The development of taxonomies can be considered a decisive contribution towards a harmonised view. The environmental pillar has made the fastest progress, although this taxonomy is not yet fully consolidated, as it is a "live" framework, open to new activities and to the ongoing review of its technical selection criteria. With regard to the social pillar, taxonomies are still to be determined and are not expected in the medium term.

Another aspect is the availability of quality data. The Non-Financial Reporting Directive has made considerable progress in this area. However, there is still room for improvement in the harmonisation of reporting standards and calculation methodologies for certain indicators. We are confident that the new Corporate Sustainability Reporting Directive (CSRD) and the standards proposed by EFRAG (European Financial Reporting Advisory Group) will lead to progress in transparency and comparability.

The sector is responsible for channelling resources towards sustainable activities. This transversality in the economy could lead to a supervisory role being attributed to it, requiring it to play a kind of "green police" role that goes beyond its functions. The legal responsibility for the information provided to the market should be focused on the counterparty in question, which has direct management capacity over ESG issues.

Despite these difficulties, the financial sector is well aware of the fact that the risk of greenwashing exists and is detrimental to the sector. This is why we are working on the implementation of a sustainable finance system in record time, deploying a large amount of human and technological resources for the transition. In parallel to the work of each of the institutions, there has been an upsurge in alliances, geared towards establishing common methodologies (own and sectoral taxonomies), that is, a positive definition of what is sustainable. This is one of the objectives that we promote at Finresp. We understand the importance of the sector to ensure compliance with sustainability objectives, and that is why we promote the identification of best practices to place Spain at the forefront of green and sustainable finance.