Enhanced Regulatory Supervision of Asset Managers in Europe – Greenwashing Risks

A common methodology has been developed by ESMA to allow national European regulators to share knowledge and experiences to facilitate convergence in how they supervise sustainability related disclosures.

The EU's financial markets regulator and supervisor, the European Securities and Markets Authority (ESMA), announced last week that it has launched a common supervisory action with national European regulators on sustainability-related disclosures and the integration of sustainability risks.¹

The action will be conducted for the rest of 2023 until Q3 2024 and will assess asset manager's compliance with the Sustainable Finance Disclosure Regulation (SFDR), the Taxonomy Regulation and relevant implementing measures, with the following objectives:

• to assess whether asset managers adhere to rules and standards;
• gather further information on greenwashing risks in the asset management sector; and
• identify further relevant supervisory and regulatory intervention to address the issue.

The findings of this action will be factored into ESMA's Final Report on Greenwashing that is to be published in May 2024. This report will provide a stock take of supervisory powers, resources and actions to combat greenwashing, and may also have recommendations for changes to the EU regulatory framework.

This once again highlights the trend of heightened regulatory focus on combatting greenwashing, which indicates that there will be increased regulatory enforcement coming down the line for those falling below the requisite standards. This common supervisory action will likely lead to increased sophistication and diversification of regulatory action in monitoring asset managers through regulators sharing their knowledge and learning from their experiences. 

This action is also against the backdrop of growing ESG international standardization as the International Sustainability Standards Board has recently released in IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2 – General Requirements for Disclosure of Sustainability-related Financial Information. These standards also intend to facilitate international convergence on ESG representations to prevent greenwashing.² It is anticipated that many jurisdictions will implement these standards very shortly. We will be keeping this under close review, so watch this space.

¹ESMA and NCAs to assess disclosures and sustainability risks in the investment fund sector