ESMA lays out strategy on ESG factors

By Lene Powell, J.D.

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has published a new strategy describing how ESMA will place sustainability at the core of its activities by embedding Environmental, Social, and Governance (ESG) factors in its work. The Strategy on Sustainable Finance focuses on transparency obligations, risk analysis of green bonds, ESG investing, convergence of national supervisory practices on ESG factors, taxonomy, and supervision.

"The financial markets are at a point of change with investor preferences shifting towards green and socially responsible products, and with sustainability factors increasingly affecting the risks, returns and value of investments," said ESMA Chair Stephen Maijoor. "ESMA, with its overview of the entire investment chain, is in a unique position to support the growth of sustainable finance while contributing to investor protection, orderly and stable financial markets."

Underpinnings. In March 2018, the European Commission unveiled its Action Plan on Financing Sustainable Growth as a step in implementing the Paris Agreement on climate change and the EU's agenda for sustainable development. The Action Plan has three main objectives:

• Reorient capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth.
• Manage financial risks stemming from climate change, environmental degradation and social issues.
• Foster transparency and long-termism in financial and economic activity.

To further the Action Plan and respond to the increasing importance of ESG factors in the financial markets, ESMA drafted a strategy to take ESG factors into account across the range of its activities and monitor and assess ESG-related market developments and risks.

Growing sustainable finance. ESMA outlined six key priorities:

• Completing the regulatory framework on transparency obligations via the Disclosures Regulation. ESMA will work with the EBA and EIOPA to produce joint technical standards.
• Reporting on trends, risks, and vulnerabilities (TRV) of sustainable finance by including a dedicated chapter in its TRV Report, including indicators related to green bonds, ESG investing, and emission allowance trading.
• Using the data at its disposal to analyze financial risks from climate change, including potentially climate-related stress testing in different market segments.
• Pursuing convergence of national supervisory practices on ESG factors with a focus on mitigating the risk of greenwashing, preventing mis-selling practices, and fostering transparency and reliability in the reporting of non-financial information.
• Participating in the EU Platform on Sustainable Finance that will develop and maintain the EU taxonomy and monitor capital flows to sustainable finance.
• Ensuring ESG guidelines are adhered to in the entities that ESMA supervises directly, while being ready to accept any new supervisory mandates related to sustainable finance.

Next steps. The strategy document includes a timeline for achieving key priority goals. Overseeing the work is the Coordination Network on Sustainability, composed of experts from national competent authorities and ESMA staff. The network will be supported by a consultative working group of stakeholders that will be established in the coming months.