Sustainable Finance
The transition towards a greener and more sustainable economy has become a priority for the European Union. ESMA aims to ensure that the financial markets support and promote this shift by integrating environmental, social and governance - ESG - factors across its core activities.
Our Role
The shift of investor preferences towards financial products which incorporate ESG factors and the increasing impact of such factors on the risks, returns and value of investments have implications for ESMA’s mission to enhance investor protection and promote stable and orderly markets.
To this end, ESMA is actively contributing to the development of the sustainable finance rulebook and to its consistent application and effective supervision by making use of its regulatory and convergence toolkit as necessary. ESMA also engages in risk assessment and market monitoring activities focusing on potential financial stability and investor protection risks stemming from ESG factors.
In February 2020, ESMA adopted its first Strategy on Sustainable Finance to take account of sustainable business models and integrate ESG related factors across its four main activity areas of single rulebook, supervisory convergence, direct supervision and risk assessment.
Sustainable Finance Roadmap
ESMA published its Sustainable Finance Roadmap 2022-2024 to ensure the coordinated implementation of ESMA’s broad sustainable finance mandate for this timeframe. This Roadmap provides transparency on ESMA’s sustainable finance deliverables and outlines how they are expected to be sequenced over the coming years. ESMA identified three key priorities for its sustainable finance work:
Promoting transparency and tackling greenwashing
The combination of an increasing demand for ESG investments and rapidly evolving markets requires that high quality sustainability disclosures are provided to investors. Such disclosures lower risks for greenwashing. Greenwashing is a complex and multifaceted issue which takes various forms, has different causes and has the potential to detrimentally impact investors looking to make sustainable investments.
Investigating this issue, defining its fundamental features and addressing it with coordinated action across multiple sectors, finding common solutions across the EU, are key to safeguarding investors.
ESMA and the other European Supervisory Authorities (ESAs) received a request for input from the European Commission on greenwashing risks in relation to sustainability claims and the supervision of sustainable finance policies. The request addresses three main areas: understanding and better monitoring greenwashing and related financial risks; taking stock of implementation and supervision of sustainable finance policies; and assessing the supervisory and enforcement response. The ESAs are asked to work “individually but in a coordinated manner”. ESMA is leveraging on the planned activities from its Sustainable Finance Roadmap to deliver.
Building NCA’s and ESMA’s capacities
The growing importance of sustainable finance requires NCAs and ESMA to further develop skills beyond their traditional areas of focus to understand and address the
supervisory implications of new regulation and of novel market practices.
ESMA is building its, and NCAs’, capacity on sustainable finance through:
- A multi-year training programme;
- Facilitating the active sharing of supervisory experiences among NCAs.
These efforts also contribute to creating effective and consistent supervision in the area of sustainable finance.
Monitoring, assessing and analysing ESG markets and risks
The objective is to identify emerging trends, risks and vulnerabilities that can have a high impact on investor protection and on financial market stability.
ESMA leverages on its data-analysis capabilities to support its own and NCAs’ supervisory work and to promote a convergent approach among NCAs.
ESMA undergoes specific activities, such as:
- Climate scenario analysis for investment funds
- CCP stress testing
- Common methodologies for risk analysis with other public bodies
Ambitious list of deliverables
To address ESMA’s three priorities, the Roadmap identifies an ambitious list of actions which ESMA is undertaking between 2022 and 2024. Some actions span several years while other actions are completed within a shorter time period.
Within each of the three priorities, ESMA has identified sectors where ESG-related risks and problems are currently perceived as having the highest potential impact on investor protection, orderly markets and financial stability. As such, the Sustainable Finance Roadmap primarily concerns the following sectors:
Cross Sectoral
- Assess greenwashing risks.
- Conduct supervisory case discussions on greenwashing among NCAs.
- Map NCAs’ supervisory role, especially on greenwashing.
- Contribute to consistency of sustainable finance legislation.
- Contribute to EC’s efforts to develop EU-wide labels for sustainable finance products.
- Establish Consultative Working Group for Coordination Network on Sustainability.
Benchmarks
- Contribute to EC’s work on aligning Climate Transition Benchmarks and Paris-Aligned Benchmarks with EU Taxonomy.
- Contribute to EC’s assessment of possibility to create ESG benchmark label.
- Monitor trends in the use of EU climate benchmarks.
- Build supervisory capacities on ESG compliance of critical/third country benchmark administrators.
Investment Management
- Contribute to EC’s work on minimum sustainability criteria for SFDR Article 8 products.
- Review SFDR regulatory technical standards.
- Contribute to consistent implementation of new requirements through supervisory convergence actions.
- Undertake work on climate change scenario analysis.
Credit Ratings and ESG Ratings
- Support EC in improving reliability and comparability of ESG ratings.
- Assess how CRAs incorporate ESG factors in their methodologies.
Investment Services
- Contribute to consistent implementation of requirements related to manufacturing and design of ESG products, information provided on ESG products as well as their marketing and distribution.
- Promote financial education.
- Consider implications for ESMA of the EC's plans on sustainable finance related data under the European Data Strategy to support SMEs and retail investors.
- Collect data on distribution of ESG products.
Trading and post-trading
- Undertake work to consider impact of climate change in CCP stress testing
- Build analytical tools for monitoring EU carbon markets
- Contribute to consistent implementation of new requirements
▸ Trading and post-trading sections
Issuers disclosures and governance
- Contribute to EU and international sustainability reporting standards.
- Contribute to prospectus requirements for green, social and sustainable securities.
- Contribute to legislative process on sustainable corporate governance and SRD II.
- Contribute to guidance on stewardship not to impede collaborative engagement by investors on sustainability goals.
- Contribute to assessment of how IFRS reflect sustainability risks.
- Provide guidance on TR Article 8 Delegated Act.
- Prepare for supervisory powers over external reviewers for green bonds issuances.
Financial Innovation
- Identify use cases of innovative technologies that could help the transition to a greener economy (‘green FinTech’).
- Collect evidence on recent trends and interactions in relation to green FinTech and sandboxes.
Cross cutting work
Beyond the activities associated with the Sustainable Finance Roadmap, ESMA is engaged in a number of transversal activities in other areas of the sustainable finance realm.
Platform on Sustainable Finance
The Platform on Sustainable Finance was established as a permanent expert group to assist the European Commission in developing its sustainable finance policies, notably the further development of the EU Taxonomy.
ESMA, as a directly appointed member, closely monitors its work and provides input where relevant to its mandate on investor protection and financial markets’ orderly functioning and stability.
The Commission launched in October 2022 a call for applications for the Platform’s new mandate that will run from Q1 2023 to Q4 2024.
Advice to the European Commission on short-termism
Under its Action Plan on financing sustainable growth, the European Commission invited the three European Supervisory Authorities to each develop a report presenting evidence and possible advice on potential undue short-term pressure on corporations.
ESMA published its report, concurrently with the publication of reports from EBA and EIOPA.
In its report, ESMA covered several key topics and notably recommended that action be taken in two specific areas:
- Disclosure of ESG factors, including:
- amending the Non-Financial Reporting Directive;
- promoting a single set of international ESG disclosure standards; and
- requiring the inclusion of non-financial statements in annual financial reports.
- Institutional investor engagement, including:
- a review of ESMA’s White List under the Takeover Bids Directive;
- a potential shareholder vote on the non-financial statement; and
- monitoring the application of the revised Shareholder Rights Directive.
