EU regulator targets misleading environmental and climate claims

The European Securities and Markets Authority (ESMA) has published two new guidance notes aimed at helping investment firms and other financial market participants make clearer claims about the environmental and social benefits of their products and avoid misleading investors. The EU’s financial markets regulator said the publications focus on positive impact claims and climate transition claims across investment funds, bonds and financial benchmarks. The first note examines claims that investments generate positive environmental or social outcomes, highlighting differences in how market participants define impact and the level of ambition behind their statements. ESMA encourages firms to explain clearly what difference they expect their products to make, how they intend to achieve that impact and how they will measure the results. The aim is to ensure investors receive clear and balanced information about the benefits being claimed. The second note focuses on climate transition claims, which describe how investments or financial products support a shift towards a lower-carbon economy. Such claims are often forward-looking and subject to uncertainty because their success can depend on future actions, assumptions and factors outside a company’s control. ESMA said market participants should clearly explain their transition objectives, how they expect to achieve them and how progress will be assessed and communicated. They should also disclose relevant assumptions, limitations in the available data and dependencies that could affect whether the objectives are achieved. Both notes provide practical examples of good and poor practices, offering guidance on what firms should and should not do when making sustainability claims in communications that are not part of formal regulatory disclosures. The regulator said the guidance is intended to promote communications that are clear, fair and not misleading, thereby reducing the risk of greenwashing, where the environmental or social benefits of a product are overstated or presented inaccurately. The publications form part of ESMA’s wider work to improve transparency and consistency in sustainability-related information provided to investors. They follow earlier thematic notes covering environmental, social and governance (ESG) credentials and ESG investment strategies. ESMA stressed that the latest notes do not introduce new regulatory requirements and should not be interpreted as prescribing a particular investment approach or level of ambition. This also applies in the context of the ongoing review of the EU’s Sustainable Finance Disclosure Regulation (SFDR). Instead, the documents draw on observed market practices and provide examples to help financial market participants understand existing expectations under the principle that communications must be clear, fair and not misleading.