ESMA opinion on sustainable investments: Facilitating the investor journey

On 24 July 2024, the European Securities and Markets Authority (“ESMA”) published an opinion: “Sustainable investments: Facilitating the investor journey – a holistic vision for the long term” setting out ESMA’s long-term vision on the functioning of the Sustainable Finance Framework. The opinion builds on findings of the ESMA Progress Report on Greenwashing (link) and represents the last component of ESMA’s reply to the European Commission’s request to the European Supervisory Authorities (ESAs) for input related to greenwashing risks and supervision of sustainable finance policies, next to the Final Report on Greenwashing (link).

The opinion contains a number of recommendations:

Consumer and industry testing

• Consumer and industry testing should be used to ensure that policy solutions are appropriate for retail investors as well as the feasibility and workability for those solutions.

EU Taxonomy as a central point of the framework

• The EU Taxonomy should become the sole, common reference point for the assessment of sustainability and should be embedded in relevant legislation.
• The EU Taxonomy should be completed, including with a social taxonomy.
• The Sustainable Finance Disclosure Regulation’s (“SFDR”) definition of ‘sustainable investments’ should be phased out.

Effectively support the transition

• Complement current disclosures to provide information on the share of revenue and Capital Expenditure (CapEx) associated with harmful activities that are in a transitioning trajectory or are decommissioning.
• Provide a legal definition of transition investments.
• Ensure the consistency of transition-related disclosure requirements in EU legal texts.
• Take stock of transition plan disclosures to ensure credibility and consistency.
• Develop a broader set of transition benchmarks and raise the ambition of EU Climate Benchmarks.
• Develop high-quality standards for transition bonds and sustainability-linked bonds.

Adapted transparency requirements

• Development of minimum sustainability disclosures for all financial products consisting of a small number of simple sustainability KPIs.
• Simple sustainability disclosures for certain financial instruments not captured by the SFDR.
• A sub-set of sustainability disclosures (‘vital’ information) to be provided to retail investors, while the entire set of sustainability information would be available to all professional and retail investors. Use of layering for documents distributed in digital format.
• ‘Vital’ information to be placed in short consumer facing documents, like the PRIIPS KID (key information document (KID) for packaged retail and insurance-based investment products (PRIIPS).
• Alignment between product names, marketing material and sustainability profile of products.

Implementation of a product categorisation system

• Establishment of a product categorisation system that includes strong categories for sustainable and transition investments.
• Regular review of eligibility criteria of categories, weighed against the need for regulatory stability.
• Categories subject to supervision by National Competent Authorities (“NCAs”).
• Assessment of the feasibility and usefulness of a grading system, although recognising the methodological challenges to capture the multiple dimensions of sustainability.
• Streamline the way in which investors are asked to express their sustainability preferences with the future product categorisation.

ESG data quality

• Monitor the practical application of the ESRS.
• Continue improving the consistency of ESG metrics across the framework.
• Ensure reliability of estimates.
• Continue improving standardisation and machine-readability of sustainability disclosures.
• Bring ESG data products within the regulatory perimeter.

Conduct of Sustainable Investment Value Chain (“SIVC”) actors

• 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 SIVC.
• Due diligence obligations for the financial and non-financial sector should be well-defined.
• Deeper integration of the concept of active engagement with investee companies.
• Consider the introduction of an EU-wide stewardship code for market actors.

It is worth noting that the document is an opinion which does not introduce any standards or requirements. However, it provides an identification of potential development, intention and goals in connection with the sustainability framework in the view of ESMA.

The opinion from ESMA can be assessed and read here.

Tags:  ESMASustainability