The European Securities and Markets Authority (ESMA) has taken another step in its ongoing mission to combat greenwashing within the financial services sector. With the release of a new thematic note, ESMA aims to ensure that sustainability claims made by firms are clear, fair, and not misleading. This latest guidance focuses specifically on “ESG credentials”—a term that encompasses claims about participation in voluntary alliances or initiatives, ESG labels, ESG awards, and comparisons to peers. Asset managers should review and consider against their own practices.
The Four Guiding Principles for Sustainability Claims
ESMA’s guidance is structured around four core principles that should underpin all sustainability-related claims. While these principles do not introduce new disclosure requirements, they are intended to be applied consistently across all communications issued by firms. The principles are as follows:
- Accurate: Sustainability claims must fairly and accurately represent a product’s sustainability profile. Firms are cautioned against exaggeration and are encouraged to maintain consistency across all communications. Claims should avoid omissions and vagueness, instead being precise and reflecting both positive and negative aspects. The use of ESG terminology, as well as non-textual imagery or sounds, should align with the actual sustainability profile of the entity or product and should not distract from other important content.
- Accessible: Information underpinning sustainability claims should be easy to access and navigate. While claims should not be oversimplified, they must remain easy to understand. Where further explanation is necessary, it can be provided in layers, provided that each layer remains comprehensible to investors.
- Substantiated: All claims must be supported by clear and credible reasoning, facts, and processes. The substantiation should rely on methodologies that are fair, proportionate, and meaningful. When making comparisons, firms should ensure they are comparing “like with like” and should clearly state any limitations of the information used.
- Up to Date: Sustainability claims must be based on the most current information available. Any changes to the underlying facts or circumstances should be disclosed promptly to ensure ongoing accuracy.
Best Practice Guidance: Do’s and Don’ts for ESG Credentials
The thematic note also provides practical examples of good and bad practice, summarised as follows:
- Firms should clearly explain how the criteria for ESG credentials are met and how these credentials are material to the ESG profile of the product or entity. Exaggerated or outdated credentials should be avoided.
- ESG credentials should not be referenced for products that do not incorporate sustainability considerations (such as Article 6 products under the SFDR).
- When referencing participation in industry initiatives, firms should clarify what membership entails and whether it requires any specific commitments. Transparency regarding the initiative, any ratings awarded, and the status of continued membership is essential.
- The use of labels and awards in communications should be accompanied by transparent information about the governance of the award and the eligibility criteria. Any conflicts of interest, such as fees paid or sponsorship of the award, should be disclosed.
- SFDR product-level disclosures should not be used as labels with colourful or potentially misleading designations.
- Comparisons to competitors must clarify the basis of the comparison, ensuring that it is fair and meaningful. The source of information and any assumptions made should be disclosed.
Key Takeaways
ESMA’s latest guidance underscores the importance of transparency in sustainability communications. The practical do’s and don’ts provided by ESMA offer a clear indication of the regulatory expectation and managers should carefully review their materials against them (particularly in relation to ESG credentials for Article 6 funds and details of participation in industry initiatives).
