Eco-money laundering: surveillance is getting organized.

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Eco-money laundering: surveillance is getting organized.

On June 4, ESMA, the European Securities and Markets Authority, published its report on the supervision of money laundering risks.

It should be remembered that, according to the European regulator, greenwashing can be intentional or unintentional, and can occur either at the level of the entity (for example, with regard to an entity’s strategy or performance in terms of sustainable development), or at the level of the financial product (for example, with regard to a product’s strategy in terms of sustainable development), or even at the level of the financial service, such as advice.

Information on sustainable development is currently a strategic monitoring priority for the European Union, and should remain so. However, to date, the Competent National Authorities (CNA) have detected only a few cases of greenwashing. ESMA explains this by various factors, such as the limited number of complaints, the absence of a detailed methodology or guidance on detecting cases of greenwashing, but also the collaborative and preventive approach of the NCAs, particularly when scrutinizing investor documentation at the authorization stage.

Artificial intelligence in the toolbox of national regulators.

We also learn that an NCA is developing a tool to detect greenwashing on the fund market, in order to supervise the sustainable development information provided. This tool uses NLP (Natural Language Processing) techniques to scrutinize fund documentation on the one hand, and analyze the sustainability profile of the portfolio on the other.

The use of this type of tool to monitor fund managers is still limited within NCAs, but has great potential, according to ESMA, especially as the European regulator is calling on the European Commission to rapidly adopt technical standards to oblige fund managers to publish their funds’ extra-financial information in a format that can be interpreted by machines, thus encouraging the development of AI-based tools. Three ANCs have confirmed the use of technical supervision solutions, and sixteen ANCs are planning to use these tools in the future.

Corrective measures for market players.

ESMA provides a concrete list of actions to be considered by market players to ensure they avoid any risk of greenwashing. These include :

  • Communicate sustainability information fairly, clearly and in a way that is not misleading.
  • Invest in capacity-building and expertise, and in IT systems adapted to managing the new flow of information on sustainable development.
  • Implement monitoring processes and report regularly on progress, where appropriate.
  • Integrate ESG risks more fully into risk management systems and strengthen controls.
  • Adapt governance structures and processes to mitigate the risks of greenwashing.
  • Carry out due diligence on ESG data with the same level of ambition and care as for financial information.

This puts further pressure on European fund managers positioned in the ESG segment, who already have to comply with new ESMA requirements published in mid-May on fund names using ESG or sustainability-related terms.