ESMA Opinion: EU Sustainable Finance Framework

Last month, the European Securities and Markets Authority (ESMA) published its opinion on the EU Sustainable Finance Framework (the “Framework”) which builds upon the recent ESMA Progress Report on Greenwashing and the Joint ESA Opinion on the review of SFDR (the “SFDR Opinion”) (see our Insight here). The opinion covers the long-term vision of the securities markets regulator, outlining their view of the Framework and setting out policy recommendations to improve and develop the Framework. 

Summary of Key Recommendations

EU Taxonomy 

• 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 suggests this would help facilitate comparability of financial products.      
• The EU Taxonomy should be completed for all activities that can substantially contribute to environmental sustainability and ESMA calls for the development of a social taxonomy. 
• The SFDR definition of ‘sustainable investments’ should be phased out. ESMA states the definition provides too much flexibility in relation to the contribution to sustainable objectives and therefore does not ensure a consistent minimum sustainability ambition of financial products. This emphasises statements made in the SFDR Opinion and the discretion of travel torwards a labelling regime and a higher standard for sustainable investments. 

Transition-related Financial Products

• A definition of "transition investments" should be incorporated into the Framework in order to provide legal clarity and promote the creation of transition-related products.
• Increase the ambition of the EU Climate Benchmarks’ minimum standards and develop a broader set of transition benchmarks covering environmental objectives to enhance the scope of transition investing tools.

Transparency Requirements

• All financial products should be required to disclose minimum basic sustainability information consisting of a small number of simple environmental and social characteristics. ESMA suggests this would improve transparency and allow for easier comparison between financial products. This has the potential to create a higher base line for existing Article 6 managers.
• An additional sub-set of ‘vital’ information to be provided for retail and less-sophisticated investors which would include sustainable disclosures in a simpler format to ensure it was easier to understand.

Product Categorisation 

• A product categorisation system should be established and include strong categories for sustainable and transition investments to assist investors with understanding the sustainability profile of a financial product.
• New rules should be incorporated into the Framework regarding the alignment of marketing material content, the product name and the sustainability profile. ESMA reiterated the view set out in the SFDR Opinion that sustainability related terms should only be used in names when products meet certain sustainability characteristics.

ESG Data

• ESG data products should be brought into the regulatory perimeter to ensure ESG data is reliable and comparable. 
• The consistency of ESG metrics should continue to be improved.

Summary

The opinion represents the final part of ESMA's response to the European Commission’s request for input on greenwashing and includes substantial proposals to the Framework which would increase the responsibility of fund managers in relation to sustainability disclosures. The focus on raising the bar for sustainable investments, setting a base line for all managers and protecting retail/consumers are all indicators that SFDR 2 will likely take the form of a labelling regime. 

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