EU issues greenwashing warning amid investments into biodiversity

The European Securities and Markets Authority (ESMA) has put out new warnings of corporate ESG greenwashing after recording an uptick in investments into biodiversity funds.

The revelations stand out within ESMA’s recent market report, in which the European Union’s securities regulator called for greater industry oversight to guard against the potential for greenwashing.

Biodiversity investments pose unique challenges in terms of data and metrics compared to traditional sustainable investments, ESMA noted, and this is largely because biodiversity encompasses a wide range of dynamic forces, “making it difficult to establish standardised metrics.”

Currently, biodiversity-related funds represent a tiny area of the market, accounting for less than 0.1% of Article 8 and 9 funds regulated in the European Union that deal with investments relating to ESG matters.

However, between June 2021 and June 2023, these funds have attracted a cumulative investment of 854 million euros ($931 million), with a significant portion of funds launched since 2022

ESMA has now emphasised that despite the current small market size, growing public awareness of biodiversity risks and increased scrutiny have raised expectations for the rapid expansion of biodiversity-related financial products in the coming years. Therefore, the regulator has called for intensified market monitoring to ensure transparency and integrity in this sector.

ESMA has been taking a tougher stance on ESG funds to combat potential greenwashing, where funds overstate their ESG credentials. This monitoring has led to the reclassification of over 300 funds from Article 9, which have a clear sustainability objective, to Article 8, which partially focuses on ESG issues. Despite these reclassifications, ESMA reported that net flows into Article 9 funds have remained resilient.

ESMA Chair Verena Ross stressed the importance of maintaining a “trustworthy environment” in the growing EU market for sustainable products. She highlighted the risk of greenwashing as a significant concern and urged the financial industry to ensure transparency and authenticity in their ESG investments.