Sustainable finance, a key area of ESMA strategy for the years 2023 to 2028 ESMA’s strategy for the next five years consists of five key areas: effective financial markets and financial stability, supervision and supervisory convergence, retail investor protection, sustainable finance, and technological innovation and increased use of data.
Following the wording of the Authority, the three first areas are “strategic priorities” and the two last ones are “thematic drivers”. Let’s go through the first thematic driver – sustainable finance.
On this topic, the general objective of ESMA is to improve the effectiveness and integrity of ESG markets. Following this goal, the Authority will assess ESG-related trends, risks, and vulnerabilities that can impact financial markets, starting with greenwashing and transition risks.
As sustainability is not all about the environment, ESMA will also progressively put more attention to the integration of social and governance factors.
In order to achieve those goals, ESMA will start by making sure the regulatory framework is workable. It will contribute to reduce its complexity, increase the availability of ESG data, and improve the consistency of the different requirements.
As the regulation on sustainable finance is new and complicated, it represents a challenge both for financial market participants and regulators. For this reason, ESMA will work together with national supervisors – the National Competent Authorities (NCAs) – to train them on this topic. This new area of regulation also represents an opportunity for ESMA to promote convergent supervisory approaches among NCAs as it is always easier to forge convergence in new areas of regulation.
The European Authority is also ready to assume possible new supervisory mandates if the co-legislators were to decide to grant them to ESMA (e.g. EU Green Bonds reviewers, ESG rating providers).
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Last, ESMA wants to make it easier for retail investors to understand and contribute to sustainable finance. In order for them to make more informed investment decisions, ESMA will promote the development of easy-to-read signals and labels and easy access to high quality ESG data. It is worth noting that this represents a very significant challenge for ESMA given the current diversity and heterogeneity of ESG labels and offers and the confusion they create for investors.
What about the coming year? ESMA 2023 Annual Working Program
On top of its five-year strategy, ESMA also publishes Annual Working Programs. For 2023, the key objectives related to sustainable finance are the following:
- Deliver on the priorities set out in ESMA’s Sustainable Finance Roadmap 2022-2024.
- Contribute to facilitating the financing of the EU transition towards a more sustainable economy, while preserving market integrity and financial stability as well as a high level of investor protection.
- Promote effective and consistent integration of sustainability-related factors in supervisory, convergence, risk assessment and regulatory activities. In order to fulfill those objectives, ESMA will publish opinions and guidance about regulations such as the new reporting standards under the Corporate Sustainable Reporting Directive (CSRD). Lastly, ESMA will keep contributing to the European standard setting work of EFRAG (European Financial Reporting Advisory Group) and monitoring the work of the ISSB (International Sustainability Standards Board). It will be interesting to see the convergence of the two organizations and how ESMA can contribute to their work.
A working program dedicated to sustainable finance? ESMA’s Sustainable Finance Roadmap 2022-2024
Another document of interest when it comes to anticipate the work of ESMA on sustainable finance is the Sustainable Finance Roadmap 2022-2024.
This document identifies three priorities for the work of the European Authority:
- Tackling greenwashing and promoting transparency
- Building NCAs’ and ESMAs’ capacities
- Monitoring, assessing and analyzing ESG markets and risks
The future of sustainable finance in Europe
Given our analysis of the work programs of ESMA, we can make a few predictions about the future of sustainable finance in Europe.
The first important trend should be simplification: simplification of the regulation to make it easier for companies to comply, and simplification of ESG indicators to make it easier for retail investors to understand and contribute to sustainable finance.
Second, the scope of inclusion of ESG topics should be broadened and social and governance topics should draw more attention.
Lastly, one needs to improve the supervision of ESG markets, in particular thanks to the training of the supervisors on those topics. Therefore, we can expect a reduction in the risk of greenwashing.