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Response to the European Commission’s consultation on a Renewed Sustainable Finance Strategy

Response to the European Commission’s consultation on a Renewed Sustainable Finance Strategy

The December 2019 Communication on the European Green Deal announced the European Commission’s intention to adopt a Renewed Sustainable Finance Strategy, building on the ten actions presented in the Commission’s 2018 Action Plan on financing sustainable growth.

The Commission conducted a public consultation on various policy options under the Renewed Sustainable Finance Strategy during spring and summer of 2020, structured into four areas. The main points of ESMA’s response to the consultation in each of these four areas are below.

Considerations on mainstreaming sustainability in the financial sector over the next ten years:

  • The Non-Financial Reporting Directive does not ensure sufficiently relevant, reliable and comparable disclosure on environmental, social and governance (ESG) factors by companies.
  • There is a lack of a legally binding definition of ESG ratings.

Strengthening the foundations for sustainable finance

  • ESMA encouraged the establishment of a European Single Access Point (ESAP), focused on collecting periodic and ongoing information prepared by companies under securities markets requirements.
  • ESMA suggested that an appropriate regulatory framework for establishing minimum standards for ESG ratings and ensuring appropriate supervision of ESG rating providers is needed, likely at the EU level.
  • ESMA called for caution in introducing new labels for ESG funds or green funds aimed at professional investors.
  • ESMA suggested there is a growing need in Europe for a methodologically robust and reliable benchmark which encompasses the entire ESG spectrum.
  • The response also provided ESMA’s views on the EU Green Bond Standard. For more information, see here.

Increasing opportunities for citizens, financial institutions and corporates to enhance sustainability

  • ESMA suggested that suitability considerations should take precedence.
  • ESMA highlighted the potential, as well as the potential risks, associated with digital finance solutions that help investors channel money to support the sustainable transition.
  • ESMA underlined the key role that international cooperation of securities regulators within the International Organization of Securities Commissions (IOSCO) and of financial regulators within the Network for Greening the Financial System (NGFS) plays in promoting standardisation and comparability of sustainable finance rules at global level.

Reducing and managing climate and environmental risks

  • ESMA highlighted that a ‘brown’ taxonomy may help investors, financial institutions and supervisors better identify and manage climate and environmental risks.
  • ESMA acknowledged the channels through which securities markets as well as market infrastructures may be impacted by risks associated to sustainability factors.
  • ESMA underlined the need to adapt the rules on fiduciary duties, best interests of investors and prudent person rules to directly require asset managers to consider and integrate negative externalities of investment decisions on sustainability.
  • ESMA referred to its recent technical advice and published guidelines in this regard and that it stands ready to fulfil a Level 2 mandate to further strengthen the framework towards integrating ESG factors into credit ratings.

Research and assessment of risks

As part of its overall mandate to monitor, assess and measure systemic risk, ESMA keeps a close watch on market developments and related risks in the area of sustainable finance. ESMA’s work is informed by indicators of both a quantitative and qualitative nature with sources comprising regulatory data as well as data from commercial data providers and public sources, taking into account gaps in data, limitations and methodological and definition issues.

Since September 2019, ESMA’s bi-annual Report on Trends, Risks and Vulnerabilities has covered considerations on risks in the area of sustainable finance:

-        ESMA Report on Trends, Risks and Vulnerabilities No. 2, 2020

-        ESMA Report on Trends, Risks and Vulnerabilities No. 1, 2020

-        ESMA Report on Trends, Risks and Vulnerabilities No. 2, 2019

The European Commission’s Platform on Sustainable Finance

Article 20 of the Taxonomy Regulation envisages the creation of a Platform on Sustainable Finance. The Platform will serve as an advisory body to the European Commission and will take over from the European Commission’s Technical Experts’ Group (TEG) on sustainable finance when the mandate of this group expired in September 2020. ESMA contributed to the work of the TEG during its mandate.

The Taxonomy Regulation establishes ESMA as a directly appointed member of the Platform on Sustainable Finance.

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 in December 2019, 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;
  •  requiring the inclusion of non-financial statements in annual financial reports; and

 Institutional investor engagement, including: