Sustainable Finance
Financial markets have a pivotal role in stimulating the transition to a sustainable economy. By channeling private capital towards green and sustainable investments, financial markets support financing the transition of the economy and catalyse the development of the Savings and Investments Union.
Our Role
Driven by its mission for investor protection, ESMA aspires to build and maintain a trusted environment for sustainable investing. Through the incorporation of environmental, social and governance (ESG) considerations in EU regulation and supervisory practices, ESMA aims at enabling investors to make informed investment decisions and participate in financing the climate and broader sustainability transition.
In its approach, ESMA looks at the sustainable investment ecosystem as a whole. The sustainable investment value chain (SIVC) has the objective to provide investors with adequate information to make their decisions, according to their financial and sustainability related needs and preferences. Next to the end investor, the SIVC is composed of interconnected actors such as financial advisors, investment managers, ESG rating providers, benchmark administrators or issuers – each having a different role in the chain.
In line with its Strategy 2023 – 2028, ESMA is committed to an effective sustainable finance regulatory framework, including to reducing its complexity. Fostering the consistent application of EU rules and effective supervision by national competent authorities (NCAs) are an important part of ESMA’s efforts in the sustainable finance space. ESMA also engages in risk assessment and market monitoring activities focusing on potential financial stability and investor protection risks stemming from climate related and wider sustainability considerations.
Current activities build on the first 2020 Strategy on Sustainable Finance and on the Sustainable Finance Roadmap 2022-2024. The latter articulated ESMA’s actions over three priorities, namely promoting transparency and tackling greenwashing, capacity building as well as monitoring, assessing and analysing ESG markets and risks.
With a view to foster supervisory convergence, ESMA launched in October 2022 a Union Strategic Supervisory Priority (USSP) on ESG disclosures, prompting supervisory action at national level with common objectives, including Common Supervisory Actions (CSA) in the various sectors in ESMA’s remit (such as investment management, benchmark administrators or investment service providers).
Platform on sustainable finance
ESMA is directly appointed member of the EC Platform on Sustainable Finance, an advisory body established pursuant to the Taxonomy Regulation to assist the European Commission in developing its sustainable finance policies. ESMA follows the development of the Platform’s work, where relevant to its mandate.
The Platform published several reports and responses to consultations, covering a diverse range of topics such as simplifying the EU Taxonomy to foster sustainable finance, building trust on the transition and product categorisation. The work of the Platform also covered the development and revision of taxonomy criteria and the monitoring of capital flows. A full list of the Platform’s publications may be accessed through the link here.
Main achievements
Promoting transparency and tackling greenwashing
Based on rising expectations for supervisors to step up in ensuring investor protection and market integrity, ESMA dedicated a priority workstream to greenwashing. The objective was to map relevant supervisory risks across the SIVC and to take stock of the supervisory and enforcement response. The work was also driven by an EC request to the three ESAs in May 2022.
ESMA published the Progress Report in June 2023 presenting the common ESA’s high-level understanding of greenwashing and mapping areas most exposed to greenwashing risks across the SIVC. Greenwashing risks were found high for sustainability claims made for instance on real-world impact, those with forward-looking information and pledges about future sustainability performance, those related to sustainability strategy and ESG credentials, board’s and senior management’s role or corporate sustainability resources and expertise.
Building on these findings, ESMA published a Final Report in June 2024, which assessed the role of supervision in mitigating greenwashing risks. It took stock of the supervisory response and provided a forward-looking view of how supervision could be gradually enhanced in coming years, a journey through which NCAs should also achieve supervisory convergence.
Consistency and usability of the Sustainable Finance Rulebook
Following the rapid evolution of the sustainable finance rulebook, ESMA published in July 2024 an Opinion setting out strategic views on the functioning of the regulatory framework, aspiring to its ideal end-state. The Opinion acknowledges the positive achievements and the progress accomplished so far. Adopting a longer-term perspective, the Opinion makes recommendations for further improvements to facilitate investors’ journey for sustainable investments, enhance usability and coherence of the framework in support of the SIVC.
Building NCA’s and ESMA’s capacities
To deepen the knowledge on supervisory implications of the sustainable finance rulebook and of novel market practices, ESMA has been implementing its multi-year Sustainable Finance Training Plan for the past three years. In this respect, ESMA organized a multitude of trainings and set up a Knowledge Hub, an IT tool supporting the learning objectives of more than 500 regulators across the EU. These efforts contribute to creating an effective and consistent supervision in the area of sustainable finance.
In addition, ESMA has been facilitating the discussion of supervisory cases to exchange views on methods and tools and to learn from peers, thereby building supervisory capacities.
Monitoring, assessing and analysing ESG markets and risks
ESMA continuously monitors ESG-related market developments and considers environmental risks in its risk assessment work, including when performing stress tests. In addition, ESMA leverages its data and analytical capabilities to support its own and NCAs’ supervisory work and to promote a convergent approach among NCAs.
The findings of ESMA’s analytical work are regularly reported through ESMA’s Report on Trends, Risks and Vulnerabilities as well as topical analysis in TRV Risk Analysis articles. The objectives are to assess progress in greening EU financial markets and to identify emerging ESG-related trends and risks that may be detrimental to investor protection or financial stability. ESMA also participates in EU and international working groups on climate risks and took part in the EU-wide climate scenario analysis involving EBA, EIOPA and the ECB.
Since 2023, ESMA has been closely collaborating with a number of NCAs to support the development of supervisory tools and methodologies to detect potential greenwashing practices by supervised financial market participants in the fund management industry.
Looking ahead
ESMA is monitoring the evolution of EU negotiations on the European Commission’s Omnibus proposals and their impact on the sustainable investment ecosystem, on the SIVC. In line with its Strategy 2023 – 2028, ESMA remains committed to an effective sustainable finance regulatory framework, while is in full support of reducing unnecessary reporting burden.
Transition finance
To be supportive of a whole-of-economy transition, so-called “transition finance” seeks to provide capital to assets and activities that are set to gradually improve their environmental performance towards sustainability. The approach supports the recognition of investments in sectors (in particular, high-impact ones) where achieving environmental sustainability requires long term, sustained investment efforts. Transition finance represents opportunities across the SIVC, via the provision of products and services, for the demand and supply of transition finance to meet.
Transition finance is still an emerging topic, with both NCAs and market players building capacity. Amid growing interest in the topic at both global and EU levels, ESMA is committed to supporting high-quality transition-related sustainability claims as described in the 2023 Progress Report.
