ESMA’s Sustainable Finance Roadmap for 2022 - 2024: ESMA takes on Greenwashing

• What is the European Securities and Markets Authority (ESMA)?
• ESMA’s activities
• How does Sustainability Fit into ESMA’s Objectives?
• ESMA’s Sustainable Finance Roadmap 2022 - 2024
• Key Priorities of ESMA’s Sustainable Finance Roadmap
• Tackling Greenwashing and Promoting Transparency
• Building National Competent Authorities (NCAs’) and ESMA’s Capacities
• Monitoring, Assessing and Analysing ESG Markets and Risks
• ESMA’s Sustainable Finance Roadmap: a Summary

What is the European Securities and Markets Authority (ESMA)?

ESMA stands for the European Securities and Markets Authority, which constitutes an independent European Union (EU) Authority. It is known as the EU Markets watchdog.

The objective of ESMA is to contribute toward safeguarding the stability of the EU's financial system by both promoting stable and orderly financial markets and enhancing investor protection.

ESMA's activities

ESMA accomplishes this objective by focusing on four distinct activities, namely:

• Assessing risks to investors, markets, and financial stability

It promotes transparency and investor protection by making information available to investors via public registries and databases and, when required, by issuing warnings to investors.

• Completing a single European rulebook for EU Financial Markets

This enhances the EU Single Market by creating a level playing field for investors and issuers across the EU.

• Directly supervising credit rating agencies, trade repositories and securitisation repositories

ESMA directly supervises Credit Rating Agencies (CRAs), Trade Repositories (TRs), and Securitisation Repositories (SRs).

• Promoting supervisory convergence

This ensures a level playing field of high-quality regulation and supervision between the EU Member States.

For more information about ESMA, its constitution, and its previous work, click here.

How does Sustainability Fit into ESMA’s Objectives?

In 2015, the EU adopted the UN 2030 Agenda for Sustainable Development, and in 2016 they adopted the Paris Agreement on climate change. Following this, on 7th March 2018, the European Commission launched an action plan for financing sustainable growth.

The Action Plan highlighted that sustainability and the transition to a low-carbon, more resource-efficient, and circular economy is fundamental in maintaining the long-term competitiveness of the EU economy. The Plan also added that the financial system has a vital role to play in that transition, by reorienting private capital into more sustainable investments and fostering more transparency and longstanding in the economy. This is where ESMA enters the picture.

It is clear that financial markets are evolving, as investor preferences are observably shifting towards an interest in financial products that incorporate environmental, social and governance (ESG) factors, which have rapidly developed over the last few years. Furthermore, sustainability factors are increasingly affecting the value, risk, and return of investments. This fluctuating environment falls directly into ESMA’s mandate of enhancing investor protection and promoting stable and orderly financial markets within the EU. 

ESMA’s Sustainable Finance Roadmap 2022 - 2024

ESMA’s Sustainable Finance Roadmap 2022 - 2024 further develops ESMA’s 2020 Strategy on Sustainable Finance and has the ultimate objective of coordinating the implementation of ESMA’s broadening sustainable finance mandate. It does so by setting out ESMA’s intended outputs on sustainable finance in the years 2022 - 2024 and outlining the process of how they will be implemented. It is intended to function as a practical tool to ensure that ESMA is able to take timely and coordinated action to fulfil its mandate in the wide array of sustainable finance tasks, both at the level of the individual sectors and transversely across the different sectors. 

The roadmap sets clear priorities that will direct ESMA’s work and expounds a list of 71 actions and deliverables that will be undertaken between 2022 and 2024. The roadmap will also act as a benchmark that will assist ESMA in reviewing and assessing its progress in reaching the identified priorities and, where necessary, to re-adjust the implementation actions envisaged or the priorities themselves, for example in response to developments at European or international level.

Key Priorities of ESMA’s Sustainable Finance Roadmap

The roadmap centres around three main priorities:

1. Tackling greenwashing and promoting transparency

Although the growing demand for ESG investments is a vital step towards achieving the objectives of the European Green Deal, the demand for ESG investments, coupled with fast-paced evolving markets, creates space for greenwashing. Greenwashing can mislead, and therefore adversely impact investors looking to make sustainable investments, therefore it is fundamental that ESMA acts to investigate and address this concern. This is why Greenwashing has been identified as the cornerstone of the Roadmap and, among others, ESMA has pledged to undertake the following actions to address it:

• Contribute to the European Commission’s (EC) efforts to develop EU-wide labels, e.g. the EU Green Bond Standard;
• Cooperate with the EC, European Financial Reporting Advisory Group (EFRAG), and International Accounting Standards Board (IASB) on delivering an assessment of whether international financial reporting standards (IFRS) appropriately integrate sustainability risks;
• Contribute to EC’s planned work to review the minimum standards for both Climate Transition Benchmarks and Paris-Aligned Benchmarks to ensure that the selection of underlying assets is coherent with the EU Taxonomy.

2. Building National Competent Authorities (NCAs’) and ESMA’s capacities

Sustainable finance is an encyclopaedic field in which the expertise of both NCAs’ and ESMA needs to be refined. In order to fully understand and address the supervisory implications of new regulation and market practices in this field, both NCAs and ESMA need to have a good handle of both the relevant legislation and a thorough comprehension of the intersection between sustainability matters and finance. In order to facilitate this, ESMA has pledged to carry out the following:

• Facilitate the exchange of knowledge and information on ESG-related initiatives between NCAs through the development and implementation of a multi-year Sustainable Finance Training Plan for NCAs and ESMA staff;
• Map NCAs’ supervisory role in multiple fields, taking into account sustainable finance requirements related to investment services;
• Organise a discussion among NCAs on new climate benchmarks and how to effectively supervise them.

3. Monitoring, assessing and analysing ESG markets and risks

The principal goal of ESMA is to identify emerging trends, risks, and vulnerabilities that could have a high impact on investor protection and the stability of financial markets. Consequently, the roadmap aims to empower ESMA to leverage its data-analysis capabilities to support both its own and NCAs’ supervisory work, and therefore to promote a convergent approach among NCAs. Some of the methods it will use to achieve this include :

• Undertaking work on climate change scenario analysis, particularly by performing regular climate stress tests;
• Collecting data on the distribution of ESG products;
• Assessing data availability and quality for asset managers.

ESMA’s Sustainable Finance Roadmap: a Summary

Overall, the roadmap is a holistic, granular tool that aims to safeguard the stability of the EU's financial system by tackling greenwashing through building NCA and ESMA capacities, and by consistent monitoring, assessment, and analysis of the ESG markets. To reflect the rapidly evolving nature of sustainable finance, the roadmap will constitute a living document that will be kept under review during its implementation period, thereby ensuring that it continues to target the most critical challenges that arise under ESMA’s sustainable finance mandate. 

ESMA has already begun implementing the first roadmap activities and is currently seeking candidates for its newly-established Consultative Working Group (CWG) of the Coordination Network on Sustainability (CNS) before the 4th of May 2022.

The first EU Taxonomy reports are due since the 1st of January! Greenomy offers a comprehensive new EU Taxonomy solution that aims to support investors, companies, financial institutions and auditors through the process and make sustainability reporting easy and cost-effective. Get in touch  to learn more about how Greenomy can help you comply or to book your demo!