The European Securities and Markets Authority (ESMA) has officially published an updated Opinion setting out its proposals for desirable improvements to the overall European Sustainable Finance Regulatory Framework.
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The European Securities and Markets Authority (ESMA) has officially published an updated Opinion setting out its proposals for desirable improvements to the overall European Sustainable Finance Regulatory Framework. The document, published on 24 July 2024, provides a broader view on the long-term goal and potential refinements to the Framework, taking into account the comments already made in the Joint ESAs Opinion on the assessment of the Sustainable Finance Disclosure Regulation (SFDR) from 28 June 2024, as well as their own Final Report on Greenwashing from 4 June 2024. We can also see that their position and recommendations are basically in line with BaFin’s official view on SFDR from 17 July 2024, which you can read more about in our blog post.
In their latest official publication ESMA first acknowledges the significant development of the Framework over the past years and highlights its positive impact in attracting more private capital to sustainable investments. At the same time, it recalls that the EU’s goals of achieving climate-neutrality by 2050 and reducing greenhouse gas (GHG) emissions by at least 55% by 2030 require even more activity in this area, with more precise measures to facilitate access to all types of sustainable investments for all investors, including retail investors, whose knowledge of the market is often limited, and who are therefore more likely to rely on external investment advice.
In ESMA’s opinion, the building blocks of a more investor-friendly Sustainable Investment Value Chain (SIVC), which includes issuers, ESG rating providers, benchmark administrators, asset managers, financial advisors and both retail and professional investors, should consist of:
Establishment of the EU Taxonomy as the single reference point for defining a “sustainable investment”
ESMA’s recommendation on this point is clear and in line with ESAs joint opinion from 28 June (see our blog post for more details) as well as BaFin’s proposal from July 17, 2024 (visit our blog post for more details), and aims to remove any confusion and potential double standards in the market in this regard. It also notes that a definition of “social investment” should be added to the EU taxonomy and that the additional definition of “sustainable investment”, which is currently part of the SFDR, should be removed.
Introduce a comprehensive definition for transition investments
Facilitating the transition to sustainability for investment instruments is a key focus for accelerating the development of SIVC. For this reason, ESMA considers it essential to establish an official definition of “transition investments” and a clear disclosure framework for these products, including a set of transition benchmarks and exclusive specifications for transition bonds and sustainability linked bonds.
Enforce consumer and industry testing
ESMA’s proposal echoes the ESAs previously announced statement that, prior to the official introduction of any changes to the Framework, a testing period should be planned during which Financial Market Participants (FMPs) and end-users can review and provide feedback on the new regulatory recommendations.
Simplify disclosure requirements
ESMA reiterates the need for retail investors to have easy to understand information on the sustainability of investment products. Its proposal is to develop an additional, much simpler version of the sustainability disclosure. In their view, these documents should contain only the most “vital” information and present only a pre-defined subset of simple sustainability KPIs. They also note that products that are not covered by the SFDR requirements should still have simple sustainability disclosures, which will allow a common standard for all products on the EU market, regardless of their declared sustainability initiatives.
Put a product categorisation system in place
The definition of clear criteria for both sustainable and transitional products is a must, according to ESMA. The main objective of introducing such a standardised categorisation system is to provide retail investors with an easily recognisable structure of the sustainability characteristics of products. The Authority acknowledges that such a new system would require additional effort and cost for all FMPs, but believes that this effort is worthwhile as it will certainly lead to a more agile SIVC, based on a customer friendly approach.
Improve ESG data quality throughout SIVC
In its statement, ESMA highlights the need to introduce an official regime to monitor the quality of ESG data at each step of the Sustainable Investment Value Chain (SIVC). A key point is the forthcoming introduction of the European Sustainability Reporting Standards (ESRS), which are expected to significantly improve ESG data quality and fill some of the gaps identified in the market. At the same time, as the ESRS are directly linked to reporting under the Corporate Sustainability Reporting Directive (CSRD) and not all FMPs fall within the scope of this regulation (read more about the CSRD on our dedicated website), the Authority also reaffirms the need for a holistic approach to all ESG data delivery streams and uses across the SIVC in order to create a single standard for all sustainable investments within the EU. They believe that the introduction of ESG data products, defined by the International Capital Market Association’s (ICMA) in their latest Code of Conduct for ESG Ratings and Data Products Providers, will facilitate the process of making ESG data more reliable and comparable.
Involve all actors on the market in the due diligence
The final important point that ESMA mentions in its opinion is that all actors in the European financial market should be encouraged to conduct their own due diligence and materiality assessment in line with their position within the SIVC. In this regard, they also suggest that clear due diligence obligations should be imposed on both the financial and non-financial sectors in the EU and express their support for the forthcoming Corporate Sustainability Due Diligence Directive (CSDDD) in this direction. The standardisation of sustainability reporting should remain a priority for the EU Commission, and the Authority suggests that investee companies should be more actively involved in the whole process, which can be further developed through the introduction of a common stewardship code for all actors in the EU market.
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