ESMA has published a ‘Thematic note on clear, fair & not misleading sustainability-related claims’ to help promote clarity in sustainability-related communications.
This first note focuses on ESG credentials (such as ESG labels or awards, voluntary initiatives or alliances, and comparison to peers). The publication offers helpful guidance on how EU rules apply in the context of promotional materials. It outlines four guiding principles and offers a set of practical do’s and don’ts, illustrated by real-life examples based on observed market practices.
Significance for firms
This note serves as a reminder of the focus that regulators currently have on greenwashing.
Importantly, whilst the guidance contained in the note does not introduce new regulatory or reporting requirements, market participants are encouraged to familiarise themselves with the principles in order to avoid the risk of greenwashing, or overstating the significance of ESG credentials. This may require firms to revisit their processes to ensure that the sustainability related claims they make indeed meet regulatory expectations, and in particular in the context of this latest guidance, the claims they make that reference ESG credentials.
The note forms part of broader efforts to reduce greenwashing risks and ensure that investors are not misled by ESG claims, and other notes are expected to follow on other topics (as judged necessary). Firms should keep a look out for these future notes.
ESMA’s four guiding principles
The guidance centres around four guiding principles that should inform and underpin sustainability related claims:
- Accurate: Sustainability claims should fairly and accurately represent the entity’s sustainability profile or its products, without exaggeration and consistently across all communications while avoiding falsehoods. Claims should be precise and based on all relevant positive and negative aspects, avoiding cherry picking or vagueness. In addition, ESG terminology and non-textual imagery or sounds must align with the sustainability profile of the entity or product and should not overshadow the other contents.
- Accessible: Sustainability claims should be presented with an appropriate level of detail so as to be understandable. Moreover, claims should not be over-simplistic. In cases where space is limited, more explanations can be provided through layered, easily accessible content, especially in digital formats.
- Substantiated: Sustainability claims should be backed with clear and credible reasoning, facts and processes. This includes methodologies (including comparisons, thresholds or underlying assumptions) that are fair, proportionate and meaningful. Limitations of information, data and metrics used in a claim should be made available, whilst any comparisons should ideally compare “like with like".
- Up-to-date: Sustainability claims should be based on current information with any material change disclosed in a timely manner. The clear indication of the analysis’ date and perimeter could be useful for this purpose.
ESMA sets out a number of good and poor practices along with do’s and don’ts.
| Type of claim | Do’s | Don’ts |
| Claims about ESG credentials | • Clarify how the credential is earned and its relevance to the product. • If linked to a third-party assessment, explain: 1) what it means, 2) underlying assumptions, 3) rating scale, 4) by whom it was issued; and 5) date. • Clarify whether ongoing monitoring exists. • Use layered information or links to webpages to avoid overwhelming the reader. | •Don’t reference ESG credentials for products that do not consider sustainability (such as funds disclosing under Art.6 SFDR for which external ratings might be available from third parties, or benchmarks that do not take into account ESG factors). • Don’t exaggerate the meaning of a credential (such as belonging to an industry initiative or getting an ESG award). • Don’t use outdated or unrepresentative credentials. • Don’t cherry-pick from multiple ratings over time or between peer groups. |
| Claims about industry initiatives | • Clarify what belonging to the initiative means (e.g. process, extra reporting whether self-reported or verified). • Give all the relevant information for the investor to understand the meaning of that rating and link to self-reported disclosures if available. | • Don’t continue referencing initiatives after leaving them. • Don’t cherry-pick or hide unfavourable ratings related to the initiative. • Don’t use claims about entity-level commitments in product-level materials without relevance. |
| Claims about labels and awards | • Clarify if the label relates to processes or outcomes. •Be transparent about the governance around the process of the awarding body, version history, and any subcategories. • Disclose any paid relationship with the awarding entity. • Mention for which period the ESG award was given and when. | • Don’t use SFDR disclosures as labels or imply they’re third-party credentials (e.g. via colourful logo’s). • Don’t imply national competent authority (NCA) approval as an award or endorsement. • Don’t claim compliance with disclosures when the product isn’t subject to them (e.g., don’t say that a benchmark is “Art.8/Arti.9 SFDR-compliant”). |
| Claims comparing to peers | • Disclose the basis for comparisons, peer group selection, and justification. • Provide the name of the peer group, coverage ratio, holding dates, and assessment dates. • Only reference comparisons for products with ESG characteristics or that have a sustainable objective. | • Don’t compare without stating data sources and assumptions. • Don’t reference ratings based on weak or non-representative peer groups. • Don’t create internal ESG classifications without ensuring these are in line with the sustainability profile of the products in question. |
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