"Different shades of green: EU corporate disclosure rules and their effectiveness in limiting “greenwashing”"

Abstract

Greenwashing is a generic term used for breaches and misleading claims about the sustainability credentials of various legal provisions, ranging from unfair competition, securities laws infringements and unethical advertising to wrong corporate disclosure. This paper focuses on the latter.

Against the background of the significant financial flows needed to finance the transition to meet the objectives of the Paris Agreement and the EU Climate law, the EU corporate sustainability reporting rules integrated in the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), as well as the EU taxonomy constitute an ambitious legislative framework which is aimed at establishing common mandatory European Sustainability Reporting Standards for companies to report comparable and relevant information required by investors and other stakeholders.

This framework’s aim is to support companies in the transition to a more sustainable economy and help stakeholders and investors understand the sustainability risks in their investments (and facilitate financial flows for the transition). This will help mitigate greenwashing risks because this framework raises the responsibility for inaccurate disclosure. In addition, accurate data are important for central bank operations because they can ensure that prices and the risk control framework adequately reflect climate physical and transition risks. The success of the regulatory framework will rely heavily on its credible implementation, including penalties, which will help anchor expectations and condition the behaviour of economic agents.

The paper also makes some recommendations going forward so that the regulatory framework for sustainability disclosure is effective in combating greenwashing. Any future regulation aimed at addressing greenwashing risks more explicitly should be based on the existing sustainability disclosure framework. The assessment in this paper is based on the originally agreed legal texts of the CSRD, CSDDD and the EU taxonomy. This paper focuses solely on the assessment of the relevant Union law in light of the economic literature concerning the regulatory tools effective to deal with financial "greenwashing" and is without prejudice to the future omnibus package on sustainability [...]

Following a review of existing literature, this paper analyses entities’ disclosure requirements in the EU, including any due diligence requirements. It aims to assess whether the existing EU sustainable disclosure framework is effective in limiting the possibilities of greenwashing. Our paper takes the perspective of corporate disclosure and reporting requirements imposed on entities, including a focus on banks (EBA, 2023; ESMA, 2023). The assessment is based on the originally agreed legal texts of the CSRD, CSDDD and the EU taxonomy. It is noted that on 26 February 2025, the European Commission published omnibus packages bringing together proposals that will amend the three pieces of sustainable finance legislation.

The paper concludes that the EU has created a nexus of legal provisions based on the European Climate Law1 (ECL) and corporate disclosure requirements set out in the flagship EU regulations: the Taxonomy Regulation,2 the Corporate Sustainability Reporting Directive3 (CSRD), the Corporate Sustainability Due Diligence Directive4 (CSDDD) as well as the new Capital Requirements Directive (CRD VI) and Capital Requirements Regulation (CRR III)5 , which taken together limit the possibility of greenwashing and provide for severe sanctions for environmental, social and governance (ESG) misrepresentations. Hence, it is important that the simplification and streamlining initiated by the European Commission preserves the elements in the sustainable finance framework that prevent greenwashing. A few non-exhaustive examples of such elements may include, inter alia, transition plans, third-party verifiers, disclosure templates and standards on climate change and biodiversity, as well as enforcement and sanctions. [...]