The European Securities and Markets Authority (ESMA) recently released the sustainable finance roadmap for 2022-2024, in which the market regulator has set out priority areas and related actions in sustainable finance and strategy to be implemented in three years.
ESMA is diligently contributing to the development, application, and administration of the sustainable finance rulebook. Additionally, ESMA also monitors the market activities and latent risks associated with ESG factors. The purpose is to improve investor protection and promote stability in the financial markets.
Accelerating the scope of ESMA’s 2020 Strategy on Sustainable Finance, the new sustainability or ESG reporting Roadmap identifies the priorities with underlying challenges and plan of action. The roadmap is built on the objective of achieving coordination across various departments and will ensure the comprehensive delivery of sustainable finance tasks by ESMA.
According to Verena Ross, Chair of ESMA, a boost in sustainability or ESG reporting agenda will not only help investors but will also help the European Union to meet its climate change tackling commitments. The roadmap will strengthen and prioritize the sustainable finance issues and ESMA’s actions will play an important role in contributing to the European Green Deal.
Priorities identified in the ESMA Sustainable Finance Roadmap
The roadmap defines the following three priorities in the period from 2022 to 2024:
- Tackling greenwashing and promoting transparency;
- Building National Competent Authorities (NCAs) and ESMA’s sustainable finance capacities
- Monitoring, assessing, and analyzing ESG reporting related markets and risks.
a) Tackling greenwashing and promoting transparency
Fast-evolving markets and rising demand for ESG reporting across industries and investors have given rise to greenwashing concerns. Spotting greenwashing in ESG investments is a complicated issue as it can arise from different causes. Generally identified as a misrepresentation of financial products, services, or investments, greenwashing can significantly impact investors who want to make sustainable investments. To protect the interests of investors it is important to analyze the greenwashing issue, define its fundamental features and take coordinated actions in different sectors/areas to come to a standard solution across the EU.
b) Building NCAs’ and ESMA’s sustainable finance capacities
The growing demand and evolution of sustainable finance make it indispensable for ESMA and NCAs to go through a ‘learning curve’ and develop skill sets beyond the conventional focus areas. This requires a basic understanding of the transition to ESG reporting and the supervisory implications of the new regulation. The multi-year training program proposed by ESMA will help to cultivate the learning of sustainable finance, assist the sharing of supervisory experiences among NCAs and create a common supervisory culture for sustainable finance
c) Monitoring, assessing, and analyzing ESG reporting-related markets and risks
It is important to keep a track of emerging trends, the functioning of the ESG reporting market, and risks that may disrupt the stability of financial markets or investors’ interests. ESMA will enhance its monitoring, support NCAs’, supervisory work and promote a consolidated approach among NCAs by using its data-analysis capabilities. This will be done by engaging in activities like climate scenario analysis for investment funds, CCP stress testing, and common methodologies establishment for climate-related risk analysis with other EU institutions.
This roadmap will aid ESMA to address the above-mentioned priorities and identify ESG reporting-related risks concerned with sectors like investment management, investment services, issuers’ disclosure and governance, benchmarks, credit and ESG ratings, trading, post-trading, and financial innovation. These actions will also pave the way to achieving the 2021 Renewed Sustainable Finance Strategy of the European Commission.
Next plan of action
The work on the first Roadmap activities has already been commenced by ESMA. The next step includes gathering future insights from stakeholder candidates through a future Consultative Working Group of the Coordination Network on Sustainability Reporting.
The identified priorities and sectors within the Sustainable Finance Roadmap will be under review by ESMA during the next three-year implementation period from 2022 to 2024. This will help ESMA to identify the crucial issues related to the mandate and address potential gaps that may occur due to evolving priorities in the field of ESG reporting and finance.