The European Supervisory Authorities (ESAs), including the European Insurance and Occupational Pensions Authority (EIOPA), have been asked by the European Commission (EC) for input on the key features of greenwashing in their relevant sectors. On 1 June, EIOPA published a progress report2 on potential forms greenwashing in the insurance sector might take, its potential effects, and the current position of regulators. A summary follows below.
What is greenwashing?
There is no one generally applicable definition of greenwashing within the EU regulatory framework. However, the ESAs have set out their common high-level understanding of greenwashing as “ a practice whereby sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants”.
Greenwashing might occur:
- At entity level (such as in relation to an insurer’s strategy or performance);
- At financial product level (e.g. in relation to a product’s sustainability strategy or performance); or
- at financial service level (e.g. the integration of sustainability-related preferences into the provision of financial advice).
It may occur at different stages of the business cycle or the sustainable finance value chain.
Effects of greenwashing on insurers
The report sets out that misleading sustainability claims can deceive customers into buying products that are not aligned with their preferences, potentially re-routing their premiums from other more sustainable providers. Greenwashing also erodes trust. Although EIOPA has not identified any major greenwashing occurrences in the pensions and insurance sectors 3, it found that cases in other sectors have already created a general mistrust on the part of consumers in relation to sustainability claims. Further, any greenwashing by an insurer would likely damage the insurer’s reputation with consequent financial damage and potential litigation. Greenwashing could hinder the provider’s solvency if affected products are surrendered en masse, and this could spread through the industry more generally with financial stability implications. There is also the potential that greenwashing will result in regulatory scrutiny and enforcement action.
In addition to the above, greenwashing clearly has the potential to impact insurers through higher claims under third party covers such as professional indemnity and D&O insurance, where greenwashing claims are made against insureds.
How does greenwashing occur?
EIOPA discusses and sets out a number of examples of potential greenwashing (although noting that no clear conclusions have been drawn at this stage on whether any of these examples definitively constitute greenwashing). Some examples follow below.
Insurance and pension providers are large institutional investors with investment strategies that set out goals, ambitions, and how they intend to achieve them. EIOPA notes an increase in sustainability claims relating to investment strategies, such as claiming there is no investment in certain sectors or setting out exclusion criteria for certain types of investments. These claims might be greenwashing where they are misleading, and there may be a temptation to portray investment activities as more sustainable than they are.
Insurers and pension providers are able to play an active role in their investee companies, moving them towards activities that positively impact sustainability factors. This might be achieved, for example, by voting in a shareholder assembly or engaging with senior management at the investee company. However, there could be greenwashing where engagement is not consistent or where engagement policies are not adequately implemented, or there is no genuine dialogue process and escalation strategy.
Some insurers have introduced exclusions in their underwriting (e.g. for activities such as coal mining or fracking). Others have restrictions on corporate clients that breach a certain greenhouse gas (GHG) threshold. Some make exceptions for corporates that the insurer assesses have appropriate transition plans. There may be potential greenwashing, for example, where there is in fact no adequate substantiation of the insured’s plans. EIOPA notes that regulatory requirements have been introduced to increase transparency in the form of the Taxonomy Regulation Article 8 and Article 6 of DR 2021/2178 that requires reporting of a KPI measuring taxonomy alignment of underwriting activities.
Where insurers themselves make net-zero commitments with respect to their underwriting portfolio, it is important that these are backed up by credible, timely transition plans.
Greenwashing might occur where unsubstantiated claims are made about the sustainability-related competence of the insurer or pension provider’s Board or Senior Management. Employee competence on these issues is also key, especially those that manufacture or distribute products, and incentives or remuneration must not drive the wrong behaviours. EIOPA notes that a poor culture that prioritises profit might lead employees to make misleading claims about product sustainability, to sell more.
EIOPA notes that reporting around sustainability is growing, including under the Sustainable Finance Disclosure Regulation, Taxonomy Regulation and the Corporate Sustainability Reporting Directive. The same level of rigour will need to be applied here as it is to financial reporting.
Third party reporting and ratings
EIOPA notes that insurance and pension providers have to rely to some extent on third party data on sustainability to fulfil their reporting obligations. However, the use of misleading third party data spreads greenwashing, and small insurers in particular might struggle to assess the data adequacy. Further, insurers and pension providers often rely on sustainability ratings, which might rate entities or products as ESG-complaint because they would not be affected financially by a natural catastrophe, but may mislead consumers into believing that the product or entity is having a positive effect on sustainability.
Product manufacturing/scheme design
Greenwashing may occur where the manufacturer does not consider whether products are aligned with the provider’s sustainability strategy or expertise. A provider might also be tempted to exploit consumer interest in sustainable products and related biases, such as by using certain words in a product’s name or certain colours in product documents (e.g. “green” or “blue”). It is also difficult to understand and measure sustainability value and so sustainability features may be over-emphasised. Finally, the product provider might fail to ensure the product addresses, over its lifetime, the target market’s sustainability-related objectives.
Greenwashing might occur where distributors mislead consumers, where there is a lack of training on sustainability features, or where distributors fail properly to assess the suitability of a product for a consumer with sustainability preferences.
Another way greenwashing might occur is in failing to consider how products work in practice. For example, an insurer might state that its claims process is sustainable because it repairs cars where possible, instead of paying for new vehicles, whereas the actual practice on the ground is different.
The call for advice also sought input on the supervision of greenwashing risks. EIOPA’s responses from national competent authorities (NCAs) noted that many had carried out preventative activity, such as giving guidance to and engaging with the industry, aimed at preventing greenwashing, and some had carried out thematic reviews or surveys. There were challenges encountered by NCAs in this area, such as the fact that assessment of whether insurance products are sustainable is challenging due to unclear, inconsistent regulatory frameworks. Some NCAs have started monitoring advertisements to ensure they are clear and non-misleading. Most NCAs were of the view that their existing and forthcoming mandates, powers, obligations and toolkits would be enough to allow them to monitor and investigate greenwashing and its risks, although some believed these needed to be further developed.
EIOPA will continue to refine and develop its views on these issues and a final report will be issued in May 2024.