Europe’s green finance rules need teeth to be enforceable

Key points

• Europe’s ambitious sustainable finance legislation risks becoming a greenwashing loophole due to fragmented enforcement and a lack of oversight, undermining the green transition and misallocating capital.
• Legislators must clarify supervisory responsibilities and harmonise sanctions through a consistent, transparent framework to deter greenwashing, level the playing field and restore investor trust in the market.
• To ensure companies’ stated ambition is consistent with their actions, further guidance is required on credible transition plans so progress can be tracked by investors across the European single market.

Europe’s sustainable finance legislation sounds ambitious, but without real oversight it risks becoming little more than a greenwashing loophole. When environmental claims are exaggerated, vague or simply misleading, investors are left in the dark and in the end the green transition of the economy pays the price. As geopolitical turmoil makes the channeling of private capital towards energy transition even more critical for energy independence and strategic autonomy, the stakes couldn’t be higher.

Financial flows are the levers that can guide the economy toward sustainable or harmful activities. Every bank loan, mutual fund investment and pension allocation contributes to determine which sectors thrive. That’s why it’s critical that sustainable finance rules support the transition and ensure that our activities are aligned with Europe’s sustainability goals. Market integrity in this context means ensuring that sustainability claims are accurate and comparable, that sustainability risks are properly identified and priced, and that capital is not misallocated due to misleading information.

How greenwashing quietly sabotages the transition

If Europe wants to reach its goals on sustainable finance, it needs clear rules, but also coordinated supervision across the EU’s 27 jurisdictions and harmonised sanctions in case companies infringe the law. When sustainability claims are inaccurate, investors may unknowingly support companies or projects that harm the environment.

Greenwashing distorts the allocation of capital, reduces market trust and undermines policy objectives like the EU’s climate targets. Supervisors therefore play a crucial role: they ensure that the legislative safeguards to prevent, identify and remove misleading claims are actually applied.

Yet today, enforcement lacks harmonisation. Different EU countries apply different rules, and the national sanction regimes for non-compliant companies are often unclear. Without consequences for misleading claims, some financial actors have little incentive to improve transparency or respect the EU taxonomy and other sustainable finance rules.

Why the European Commission supports an integrated supervision

Providing legal certainty on supervision and sanctions in case of non-compliance is not only beneficial for a proper application of the rules. It also provides companies with necessary legal certainty when operating in several member states, reduces compliance costs that would arise from unharmonised interpretations of the EU legislation and fosters cross-border activities and growth.

The benefits of a more integrated supervision has been recognised by the European Commission. In December  2025, the commission adopted a broad set of reforms known as the market integration package, designed to significantly deepen the integration the EU’s financial markets. At its core, the package aims to remove fragmentation across national markets, simplify regulatory frameworks and strengthen supervision across the single market.

These efforts are part of the wider savings and investments union strategy, which seeks to mobilise private capital more effectively across borders to support investment, economic growth and strategic priorities like digital and green transitions.

Key elements of the package include:

• removing barriers to cross‑border capital flows and investment by connecting and integrating market infrastructure, facilitating innovation (such as distributed ledger technology), harmonising regulatory requirements and facilitating distribution of investment funds across EU countries;
• strengthening supervisory powers, including proposals to enhance the role of the European Securities and Markets Authority (ESMA), improve its governance and reduce fragmentation in how financial rules are enforced across different national regulators;
• transitioning to more EU-level rules and regulations to reduce variations in how rules are implemented from one member state to another.

Harmonised supervision supports consistent application of sustainability‑related rules across the EU. Stronger cross‑border regulatory alignment creates a foundation for clearer, EU‑wide supervisory expectations around sustainability disclosures and good governance. Ultimately, it can reduce incentives for “regulatory shopping” where firms exploit loopholes in one country’s enforcement regime versus another.

Greater powers for ESMA and enhancements of the tools the regulator has at its disposal to foster collaboration between national supervisors and enforce the rules in a more harmonised way can help scale up monitoring and enforcement capacities beyond national borders. By facilitating a more harmonised supervision, these provisions can help ensure that sustainability claims are assessed and enforced on a comparable basis across the EU.

However, the market integration package will not solve all enforcement weaknesses, in particular overlaps in responsibilities of supervisors in charge of different pieces of legislation and the lack of clarity on the sanctions to which companies are exposed.

Sanctions matter to make green rules enforceable

Sanctions are not just punitive, they are preventive. A clear, harmonised sanctioning framework can:

• deter greenwashing by signalling that misleading sustainability claims will have real consequences;
• level the playing field between institutions that invest responsibly and those exploiting loopholes;
• enhance transparency by showing markets that supervisory authorities are actively monitoring and enforcing sustainability rules.

Currently, some EU frameworks, such as the sustainable finance disclosure regulation (SFDR) or the EU taxonomy, do not explicitly define sanctions. Some countries have introduced separate laws to specify the potential pecuniary sanctions, while others rely on general rules on unfair commercial practices.

Yet it is unclear whether any breach with these frameworks can be legally considered as an unfair commercial practice. This fragmentation allows inconsistent enforcement and creates uncertainty for investors and institutions alike.

To ensure that sustainability claims are credible and foster trust among investors, legislators should:

1. clarify responsibilities when rules may overlap between national financial supervisory authorities, the European financial supervisors and consumer protection authorities;
2. harmonise sanctions through a clear, consistent, and transparent sanction framework that fosters convergence across countries;
3. provide guidance on credible transition plans to ensure companies’ stated ambition is consistent with their actions and progress can be reliably understood by investors.

Greenwashing is more than a reputational risk; it is a systemic challenge for Europe’s economic transition. If supervisors acknowledge the need to accompany companies in the implementation of the new rules, they should still progressively move from dialogue to decisive action, using harmonised sanctions to protect investors and ensure that capital genuinely supports sustainable and transition activities.

Clear enforcement frameworks, credible definitions and public communication of sanctions are essential to restore trust in the market and accelerate the sustainable transition.

This article was first published by Finance Watch.

Written by