EU financial supervisors tell rulemakers to create social taxonomy, ESG benchmarks and data hub

Green securitisation is also flagged in ESAs’ response to sustainable finance consultation

The “comparability and reliability of ESG data will only improve if clear and sufficiently granular taxonomies for ‘green’, ‘brown’ and ‘social’ activities are developed and consistently implemented by the financial sector”, Europe’s three financial regulators stated this week in a letter (15 July) to the European Commission.

The European Supervisory Authorities (ESAs) were responding to a consultation on the EU’s Renewed Sustainable Finance Strategy – the sequel to its Action Plan on Sustainable Finance – and added that these taxonomies should be developed in conjunction with “common and uniformly enforced ESG-related disclosure standards for companies”. Such a standard was also called for in the ESAs’ response to the EU’s Non-Financial Reporting Directive (NFRD) consultation earlier this year.  

Last month, the EU’s green taxonomy, a key pillar of its sustainable finance Action Plan, designed to identify business activities that can legitimately be deemed green, was signed into law. 

Amendments to the taxonomy were made last year to include the possibility of extending it to cover so-called ‘brown’ or environmentally-harmful activities – a move welcomed by the EU’s Technical Expert Group (TEG) on Sustainable Finance – but now, calls for social taxonomy are also growing.  

The ESAs are made up of the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA). In the joint letter, they note a “growing need” to develop “methodologically robust and reliable” ESG benchmarks, encompassing “the entire ESG spectrum, including the social and governance aspects”.

Two regulatory benchmark categories are currently being developed by the EU: Paris-Aligned Benchmarks (PABs) and Climate Transition Benchmarks (CTBs) – see RI’s coverage of the recent consultation, but there has been no attempt to broaden these beyond climate transition.

The ESAs said that the inclusion of broader ESG benchmarks would help investors take account of the overall impact of investee companies and “permit them to build a comprehensive ESG strategy for asset allocation”, including “active investor engagement for sustainable investments”.

In its individual response to the consultation, published yesterday, EIOPA states that “while the Climate Benchmarks Regulation has created two new types of environmental benchmarks, harmonisation of criteria for benchmarks focusing on social aspects is missing”. 

The joint letter reiterated calls for “minimum standards” for ESG ratings and EU level supervision of ESG ratings providers. 

The need for a “single EU data platform” covering both financial and ESG information is raised in the letter, which the ESAs state, “would grant all market participants equal and timely access to publicly reported information”. It echoes a similar request made by the European Fund and Asset Management Association recently.  

In the EBA’s individual response to the consultation, also published yesterday, the banking regulator also states that there is now a “critical mass of green assets to make green securitisation possible”, especially in Europe. 

It added, however, that green securitisation faces a “range of limitations”, including the challenge of identifying green assets and the lack of a clear pricing advantage. 

The EBA said that there is “merit” in the idea of looking to develop a “specific framework for green securitisation”.