Fund groups warn over EU legal definition of 'greenwashing'

© Reuters. European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium, September 28, 2022. REUTERS/Yves Herman

By Simon Jessop and Huw Jones

LONDON (Reuters) - European Union regulators should not define greenwashing in law, fund industry groups have told the bloc's markets watchdog, citing concerns this would complicate a sector in "constant flux".

Trillions of dollars have flowed into investments claiming to be climate-friendly, but there have been few sanctions for greenwashing, or exaggerated green credentials.

Regulators say sanctioning greenwashing could be easier with a legal definition, though the term is often used more broadly to describe deliberate or negligent practices regarding other environmental, social and governance (ESG)-related issues.

The European Securities and Markets Authority (ESMA) and the bloc's banking and insurance watchdogs have sought industry views on legally defining greenwashing.

In its response, the U.S.-based Investment Company Institute (ICI), which represents investment funds, said sustainability-related statements, actions, omissions and communications could be misleading, either intentionally or unintentionally, at the entity, product or service level.

"Rather than seeking to define 'greenwashing' and thereby creating a new legal term, we recommend instead that EU authorities describe the conduct or circumstances of concern," ICI said.

"Seeking to adopt a general definition of greenwashing or enshrine it in legislation would be counterproductive."

The European Fund and Asset Management Association (EFAMA) said the EU should use existing rules and tools to combat greenwashing, and not increase complexity by introducing a new definition detached from rules already in place.

EFAMA also pointed to the industry's reliance on third-party data, including from companies and ESG rating companies, that was not in the control of asset managers.

"Considering the current degree of regulatory uncertainty and ongoing evolution, we must be careful to not apply the term greenwashing too broadly," said Anyve Arakelijan, Regulatory Policy Adviser at EFAMA.

"Strengthening the understanding of what constitutes greenwashing and having harmonised supervisory action to address this risk is crucial."

While major regulators have so far baulked at defining greenwashing in law, they are increasingly using their existing powers and also considering new laws in areas such as disclosure.

Britain's financial watchdog, for example, said in October it planned to bring in an anti-greenwashing rule for all firms. In the United States, meanwhile, several companies including BNY Mellon (NYSE:BK) have been fined for misleading investors.