Stockholm (NordSIP) – In a new opinion discussing potential long-term improvements to the Sustainable Finance Regulatory Framework, the European Securities Market Authority (ESMA) argued that the present definition of sustainable investments in the EU should be changed, among other recommendations. ESMA’s recommendation focused on 6 main fields of consideration.
EU Taxonomy and Redefining Sustainable Investments
According to ESMA, the EU Taxonomy should become the sole common reference point for the assessment of sustainability and should be embedded in all sustainable finance legislation. The EU Taxonomy should also be extended for all activities that can substantially contribute to environmental sustainability. The EU agency also argued in favour of the development of a social taxonomy.
ESMA also proposed that the Sustainable Finance Disclosure Regulation (SFDR) definition of “sustainable investments” should be phased out. Instead, a definition of transition investments should be incorporated into the Framework to provide legal clarity and support the creation of transition-related products. “ESMA believes that the SFDR approach of defining environmental sustainability should be phased out in due course as the EU Taxonomy is being completed. This is to remedy the current situation in which it is possible for an FMP to use its own definition to construct a product. Indeed, FMPs may currently apply weak DNSH tests to portfolio holdings or use an overly generic sustainable objective at fund level,” ESMA’s recommendation argues.
Minimum Sustainability Information
All financial products should disclose some minimum basic sustainability information, covering environmental and social characteristics. “Such minimum sustainability information could consist of a small number of key sustainability metrics in the form of key performance indicators (KPIs).
The relevant indicators should convey in a simple way the notion of sustainability, be based on existing Taxonomy information, but also leverage off reported ESRS20 and SFDR datapoints that capture specific sustainability aspects,” ESMA’s recommendation explains. The EU authority proposes GHG emissions, Impact on Biodiversity and Taxonomy alignment as examples of environmental KPIs and human rights, labour rights and Taxonomy-alignment as examples of social KPIs.
Product Categorisation and ESG Data
A product categorisation system should be introduced catering to sustainability and transition, based on a set of clear eligibility criteria and binding transparency obligations.ESMA’s categorisation system foresees a distinction between categories that cater to investments that are sustainable and categories relate to transition and cater to transition-minded investors, while also implementing a grading system.
ESG data products should be brought into the regulatory sphere. ESMA argues that this would allow ESG data to continue to be improved, ensure the reliability of ESG data estimates and continue to improve the standardisation and machine-readability of sustainability disclosures.
“The entry into force of the ESG Ratings Regulation (‘ESGR’) is expected to improve the reliability of ESG ratings and enhance transparency around them. The upcoming ESGR, however, focuses on the more limited scope of ESG ratings. ESMA is of the view that it is equally important to bring ESG data products into the regulatory perimeter to ensure that ESG data is reliable and comparable,” ESMA’s recommendation says.
Consumer and Industry Testing
Consumer and industry testing should be carried out prior to the implementation of policy solutions to ensure their feasibility and appropriateness for retail investors. ESMA argues that the responsibility of all market actors for conducting their own due diligence and making the materiality assessment should be “commensurate to their role and responsibilities” in the Sustainable Investment Value Chain (‘SIVC’).
ESMA adds that due diligence obligations for the financial and non-financial sectors should be well-defined and that deeper integration of the concept of active engagement with investee companies. The EU authority also recommends considering the introduction of an EU-wide stewardship code for market actors.
The Background
This opinion is the last component of ESMA’s reply to the EC Request for input related to greenwashing, next to the Final Report on Greenwashing. It builds upon the findings of the ESMA Progress Report on Greenwashing and the Joint ESAs Opinion on the review of the SFDR.
Almost two weeks prior, ESMA had already noted the sustainability disclosures it expected to be included in prospectuses, as part of the application of ESG disclosure requirements in the context of the 2017 prospectus regulation. Addressing an issue that has been salient lately, that statement also clarified the disclosure required in relation to use of proceeds bonds and sustainability-linked bonds (SLBs).
For example, use of proceeds bonds prospectuses could include a summary of the material information from their green bond framework or reference the legislation (that will be) used to determine the sustainability profile of the projects (if any). In SLB prospectuses “ESMA expects information about the selected key performance indicator(s) (KPIs), the sustainability performance target(s) (SPTs) and information enabling investors to assess the consistency of the KPIs and its associated SPTs with the relevant sector-specific science-based targets (if any) and the issuer’s sustainability strategy.
