ESMA Recommends Enhancements to EU Sustainable Finance Framework to Combat Greenwashing and Improve Investment Clarity

• ESMA advocates for the EU Taxonomy to be the sole reference for sustainability.
• Proposes enhanced disclosure and categorization for financial products.
• Calls for regulation of ESG data products and consumer testing of policies.

The European Securities and Markets Authority (ESMA) has published an Opinion on enhancing the Sustainable Finance Regulatory Framework, highlighting potential long-term improvements.

Current Framework

ESMA recognizes the robust development of the EU Sustainable Finance Framework, noting its existing safeguards against greenwashing. However, ESMA envisions further enhancements to facilitate investor access to sustainable investments and improve the Sustainable Investment Value Chain.

Key Recommendations:

1. EU Taxonomy as the Sole Reference: “The EU Taxonomy should become the sole, common reference point for the assessment of sustainability and should be embedded in all Sustainable Finance legislation,” ESMA stated. This would standardize sustainability assessments across the board.
2. Complete and Develop Taxonomies: ESMA advises completing the EU Taxonomy for all activities contributing to environmental sustainability and developing a social taxonomy. This comprehensive approach ensures all significant activities are covered.
3. Define Transition Investments: Introducing a clear definition of transition investments is crucial. “A definition of transition investments should be incorporated into the Framework to provide legal clarity and support the creation of transition-related products,” ESMA noted. This would foster the development of products aimed at supporting the transition to sustainable practices.
4. Enhanced Disclosure Requirements: All financial products should disclose basic sustainability information, including environmental and social characteristics. This move aims to increase transparency and allow investors to make informed decisions.
5. Product Categorization System: ESMA suggests introducing a system to categorize products based on sustainability and transition criteria. This system would rely on clear eligibility standards and enforce transparency obligations.
6. Regulation of ESG Data Products: “ESG data products should be brought into the regulatory perimeter, the consistency of ESG metrics continue to be improved, and the reliability of estimates ensured,” ESMA emphasized. Regulating these products would enhance the credibility and consistency of ESG metrics.
7. Consumer and Industry Testing: Prior to policy implementation, ESMA recommends conducting thorough consumer and industry testing to ensure feasibility and appropriateness for retail investors. This approach would help tailor solutions to real-world needs and challenges.

Related Article: ESMA Introduces Measures to Enhance Corporate Sustainability Reporting

By addressing these areas, ESMA aims to solidify the Sustainable Finance Framework, making sustainable investments more accessible and reliable for all market participants.