The EU regulatory framework on sustainable finance is already well developed and includes safeguards against greenwashing. In the long term, however, the framework could evolve further to facilitate investors’ access to sustainable investments and support the effective functioning of the sustainable investment value chain.
Sustainable Finance and Greenwashing
Potential long-term improvements have been outlined by the European Securities and Markets Authority (ESMA), the EU’s financial market regulator and supervisor, in an opinion on the European regulatory framework for sustainable finance. This opinion, which is based on the findings of ESMA’s report on greenwashing and the joint opinion of the European supervisory authorities on the review of the SFDR, is relevant – ESMA stresses – as it constitutes “the last missing piece in the Authority’s response to the European Commission’s request for input on addressing the issue of greenwashing”.
The main recommendations
Seven – according to ESMA – are the aspects on which the European Commission should focus to improve the regulatory framework on sustainable finance:
- The EU Taxonomy should become the single common reference point for sustainability assessment and should be incorporated into all sustainable finance legislation.
- The EU taxonomy should be completed for all activities that can substantially contribute to environmental sustainability and a social taxonomy should be developed.
- A definition of transition investments should be incorporated into the framework to provide legal clarity and support the creation of transition-related products.
- All financial products should disclose some basic minimum sustainability information, covering environmental and social characteristics.
- A product categorisation system that takes sustainability and transition into account should be introduced, based on a set of clear eligibility criteria and binding transparency obligations.
- Products with ESG data should be included in the regulatory perimeter, the consistency of ESG metrics should be improved and the reliability of estimates ensured.
- Before implementing policy solutions, consumer and industry testing should be conducted to ensure their feasibility and appropriateness for retail investors.
Consumer and Industry Testing
For the authority it would be prudent conduct consumer testing to ensure that proposed solutions actually support retail investors in their decisions. At the same time, consumer testing should be complemented, where necessary, with industry testing to generate input from financial market participants on the feasibility and viability of potential solutions.
EU taxonomy as a central point of the framework
According to ESMA, the EU taxonomy should be the single common benchmark against which sustainability performance is measured and should be fully integrated into the framework. In particular, the Authority suggests making the SFDR (Sustainable Finance Disclosure Regulation) definition of sustainable investments, adopted before the development of the Taxonomy Regulation, clearer and less open to interpretation, which indeed allows for a high level of flexibility as regards the contribution to sustainability objectives and the application of the “Do No Significant Harm” (DNSH). Excessive freedom and discretion in the use of the parameters indicated in the SFDR regulation does not guarantee the minimum coherent ambition of sustainability of financial products that standard setters would like. Recognizing the taxonomy as the sole point of reference for the legal framework would overcome this problem of discretion, underlines ESMA.
Effectively supporting the transition
To support the transition, ESMA believes that current disclosures need to be complemented to provide information on the share of capital expenditure and revenues (CapEx) associated with harmful activities that are in a transition trajectory. The Authority also calls on regulators to provide a legal definition of transition investments and to take stock of the information provided on the transition plan to ensure credibility and coherence. ESMA also believes that the ambition of EU climate benchmarks should be increased and high-quality standards for the transition bond and sustainability-linked bond market should be developed.
Develop minimum sustainability disclosures for all products
ESMA’s invitation to Brussels is to consider developing minimum sustainability disclosures for all financial products consisting of a limited number of simple environmental and social sustainability KPIs (Key Performance Indicators). Simple sustainability information would also be appropriate for some financial instruments not covered by the SFDR regulation, within the scope of MiFID II, in order to meet the needs and capabilities of retail investors. “In this assessment, – the document states – it is necessary to consider the ability of the instruments to effectively contribute to channeling capital flows towards sustainability objectives”.
Product categorization system
The Authority emphasizes the need for a categorization system of products that includes strong categories for sustainable and transition investments. The possible product categorisation system would consist of two parts: a set of clear, scientific, binding and measurable “eligibility criteria”; and “transparency requirements” that will apply to products to ensure that investors are provided with the required information. The new categorisation system, the authority points out, could play a particularly important role in simplifying the way investors are asked to express their sustainability preferences. According to ESMA, the introduction of categories would reduce market fragmentation and facilitate the development of the Capital Markets Union.
