“To support investment decisions, investors also need information on the sustainability impact of investments. Esma, therefore, considers that all financial products should disclose specific sustainability information regardless of the stated sustainability ambition of the product,” said EU market regulator Esma in an opinion published on Wednesday on sustainable finance. Photo: European Securities and Markets Authority

“To support investment decisions, investors also need information on the sustainability impact of investments. Esma, therefore, considers that all financial products should disclose specific sustainability information regardless of the stated sustainability ambition of the product,” said EU market regulator Esma in an opinion published on Wednesday on sustainable finance. Photo: European Securities and Markets Authority

The European Securities and Markets Authority recommended significant updates to the EU sustainable finance framework, emphasising the need for simplification and international interoperability to support long-term sustainable investments.

The Paris-based European Securities and Markets Authority has proposed comprehensive measures to refine the EU sustainable finance framework, aiming to enhance consistency and investor support for effective and long-term sustainable investments in the European Union. Esma’s 21-page opinion, on Wednesday 24 July 2024, noted that with most legislative initiatives completed, the EU sustainable finance regulatory framework represented a major leap forward in sustainable finance, positioning the EU as a global pioneer. Additionally, the EU agency acknowledged that the framework was well-developed, supported informed investment decisions and included measures to combat greenwashing.

Despite this progress, Esma and national competent authorities across member states believed the framework could mature further to better support investors’ sustainable investment journeys. By considering investors’ needs, Esma outlined a long-term vision for the framework’s development, aiming for an “ideal end-state.” This vision encompassed the framework’s architecture and the interconnectedness of its components, ensuring it helped investors navigate the diverse range of sustainable products available.

Climate targets

According to Esma, the framework evolved swiftly to mobilise private capital towards sustainable investments, aligning with the EU’s targets of climate neutrality by 2050 and a minimum 55% reduction in greenhouse gas emissions by 2030. Investors played a crucial role in directing capital towards these objectives, necessitating a framework that aided them in selecting suitable sustainable investment products with varying sustainability characteristics.

Sustainable economy

To support the financing of the transition to a sustainable economy, the framework needed to incorporate tools to help investors channel capital effectively. The EU, leading globally in this ambition, developed a more advanced framework than non-EU jurisdictions. However, Esma stressed the importance of international interoperability to bolster the competitiveness of EU capital markets.

Simplification and harmonisation

Addressing the framework’s complexity and simplifying it has been a priority for Esma. The proposals aimed to simplify and harmonise definitions across the framework to ensure consistency in legislative texts. This would support product comparability based on basic sustainability metrics, tailored disclosures to meet investors’ needs and the incorporation of signalling tools to assist retail investors in their investment decisions.

While acknowledging that the EU sustainable finance framework was well-developed and included greenwashing safeguards, Esma suggested that further evolution was needed to enhance investors’ access to sustainable investments and support the sustainable investment value chain’s effective functioning.

Esma’s key recommendations for the European Commission constitutes:

- EU Taxonomy as a common reference - The EU Taxonomy should be the sole reference for assessing sustainability, embedded in all sustainable finance legislation.

- Completion and expansion of EU Taxonomy - The EU Taxonomy should cover all activities contributing substantially to environmental sustainability, with a social taxonomy developed.

- Definition of transition investments - A clear definition should be incorporated into the framework to provide legal clarity and support the creation of transition-related products.

- Minimum sustainability information disclosure - All financial products should disclose basic sustainability information, covering environmental and social characteristics.

- Product categorisation system - Introduce a system based on clear eligibility criteria and binding transparency obligations to cater to sustainability and transition.

- Regulation of ESG data products - Environmental, social and governance data products should fall within the regulatory perimeter, with improved consistency and reliability of ESG metrics.

- Consumer and industry testing - Policies should be tested with consumers and the industry to ensure feasibility and appropriateness for retail investors.

In summary, Esma’s “opinion” presented the need for the EU sustainable finance framework to evolve continuously, simplifying investor choices and ensuring that the framework supports sustainable and effective investment decisions.

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