ESMA Publishes its Long-Term Vision on the Functioning of the Sustainable Finance Regulatory Framework

In July 2024 the European Securities and Markets Authority (ESMA) published its Opinion Sustainable investments: Facilitating the investor journey – A holistic vision for the long term-, with the aim of improving the usability and coherence of the EU Sustainable Finance regulatory framework.

In particular, the document highlights:

• The ambition to ensure that financial systems can support sustainability and transition;
• The need to ensure and promote the international operability of the EU Sustainable Finance regulatory framework;
• The need to support the competitiveness of EU capital markets.

To achieve this, complexities need to be addressed and the EU Sustainable Finance regulatory framework further simplified. Amongst other things, ESMA proposes the following recommendations:

1. Positioning the EU Taxonomy as the Central Point of the EU Sustainable Finance Regulatory Framework

The EU Taxonomy should become the sole common reference point against which sustainability performance should be measured and should be fully embedded in the EU Sustainable Finance regulatory framework. This would promote convergence in financial products offered across EU capital markets and facilitate comparability.

2. Developing Adapted Transparency Requirements

The application of specific sustainability disclosure requirements regardless of all financial products would improve transparency and facilitate comparability. They would also ensure comparability between products with an ESG objective, products with smaller ambition, and products without such ambitions.

3. Implementing a Product Categorisation System

A robust product categorisation system, including distinct categories for sustainable and transition investments, should be implemented. Specifically, product categories designed for sustainable investments should:

a) Cater to products with aligned with the EU Taxonomy;

b) Include a standardised set of metrics based on the EU Taxonomy, enabling investors to assess the level of Taxonomy alignment and make comparisons between products;

c) Comply with the (Do No Significant Harm) DNSH principle for all investments within this category;

d) Regularly review the eligibility criteria related to Taxonomy alignment with the objective of adjusting them as alignment with the Taxonomy increases in the real economy.

4. Improving ESG data quality

For companies not reporting under the European Sustainability Reporting Standards according to the Corporate Sustainability Reporting Directive, financial market participants should continue to rely on ESG data providers for their regulatory disclosures.

In this regard, ESMA stresses the need to make efforts towards ensuring the quality of ESG data products, and supports the European Commission’s announcement made in June 2023 on providing guidance to ensure that estimates are reliable and based on transparent methodologies.

ESMA also suggests that the European Commission should address ESG data issues in a holistic way to establish a regulatory regime that would provide a robust basis for the quality and reliability of ESG data products. Furthermore, ESMA takes the view that efforts should continue ensuring that sustainability information is disclosed in a standardised and machine-readable format providing stakeholders with easy access to sustainability disclosures.

The Opinion builds on the findings of the ESMA Progress Report on Greenwashing and the Joint European Supervisory Authorities (ESAs) Opinion on the review of the Sustainable Finance Disclosure Regulation (SFDR). The Opinion also represents the last component of ESMA’s reply to the European Commission request for input related to greenwashing, next to the Final Report on Greenwashing.

You can read more about the ESA’s Final Reports on Greenwashing by clicking here.