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ESMA sets out sustainable finance strategy

Out-Law News | 11 Feb 2020 | 3:01 pm | 1 min. read

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has outlined how it plans to foster sustainable finance by embedding environmental, social, and governance (ESG) factors in its work.

In its sustainable finance strategy (13 page / 162KB PDF) ESMA set out its central priorities, which include transparency obligations, a risk analysis on green bonds, ESG investing, convergence of national supervisory practices on ESG factors, taxonomy, and supervision.

Sustainability is to be embedded in the development of the regulator’s single rulebook, and ESMA also said it would aim to build common approaches for incorporating ESG factors into the supervisory practices of national authorities, 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.

The regulator said it will ensure ESG guidelines are adhered to in the entities that it supervises directly, and that it is also ready to accept any new supervisory mandates related to sustainable finance.

ESMA said it would complete the regulatory framework on transparency obligations through the EU’s Disclosures Regulation, and planned to work with the European Banking Authority (EBA) and European Insurance and Occupational Pensions Authority (EIOPA) to produce joint technical standards.

Other priority areas include using available data to analyse the financial risks from climate change, which could potentially include using climate-related stress testing in different areas of the market.

ESMA will also participate in the EU Platform on Sustainable Finance that will develop and maintain the EU taxonomy and monitor capital flows to sustainable finance.

Financial regulation expert Oliver Crowley of Pinsent Masons, the law firm behind Out-Law, said: “Whilst increased transparency will be welcomed by many investors, disclosures must be meaningful in the context of the financial institution and the asset class. In a fast-moving area, this should be a continued area of focus to ensure users of financial markets are benefiting from what will no doubt be increased regulation."

“Financial institutions should monitor the changes proposed as, given ESMA’s broad remit, in all likelihood all financial institutions will be affected to some extent,” Crowley said.

ESMA set up a coordination network on sustainability last year, composed of experts from national authorities and ESMA staff. This network will be supported by a consultative working group of stakeholders, which will be established in the coming months.

The ESMA sustainable finance plan follows a similar plan published in December 2019 by the EBA. The EBA is also proposing climate-related stress testing, along with the development of a uniform definition of ESG risks, criteria and methods for understanding their impact on institutions as well as technical standards.

In October last year a group of 130 banks from 46 countries signed up to a set of United Nations principles designed to promote a responsible, sustainable banking system, in line with global climate change and sustainable development goals.