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EU securities regulator ‘stands ready to accept new supervisory mandates’ on ESG as it releases sustainable finance strategy

ESMA mulls climate stress tests, cranks up pressure on credit rating agencies and pledges to analyse slew of green and social factors

The European Securities and Markets Authority (ESMA) has become the latest department of the EU to release a sustainable finance strategy, making a long list of commitments to the Green Deal, climate risk and broader ESG considerations.

The regulator, whose members are made up of 27 national authorities overseeing securities markets, said it “stands ready to accept new supervisory mandates [on ESG], if requested” and that it already has a series of plans to integrate sustainability further into its work.

ESMA’s Chair, Steven Maijoor, said the financial markets were “at a point of change with investor preferences shifting towards green and socially responsible products, and with sustainability factors increasingly affecting the risks, returns and value of investments”.

“ESMA, with its overview of the entire investment chain, is in a unique position to support the growth of sustainable finance while contributing to investor protection, orderly and stable finance markets,” he added.

"The framework will be broadbased and cover areas such as green bonds, social bonds, emission allowances, ESG ratings of the EU investment funds, climate-risk stress testing, and market efficiency in incentivising participants to support sustainable finance-related targets and goals"

ESMA is expected shortly to publish its advice on how the new Disclosure Regulation – one of the first wins of the EU Action Plan on Sustainable Finance – should look. In addition, it says it will “consider sustainability factors where appropriate” when it develops or updates other, non-sustainability-focused technical standards from now on.

But, according to the 13-page strategy, “the most relevant task in the short term” will be the implementation of ESMA’s guidelines on disclosure practices for credit ratings, which it published last summer in a bid to encourage greater transparency from ratings agencies on how ESG factors drive their decisions about issuers. The strategy notes a “lack of reference to ESG factors or sustainability characteristics within the legal frameworks underpinning the entities under ESMA’s direct supervision” and says it will consider the guidelines “for the purposes of supervision from 2020”.

In addition, ESMA said it is in the process of analysing current financial regulation “to identify areas where the risk of ‘greenwashing’ might arise” and will continue to do so, advising co-legislators on the topic.

Notably, it has become the latest EU body to consider conducting climate stress tests. ESMA is one of three European Supervisory Authorities, and the other two – the European Banking Authority and the European Insurance and Occupational Pensions Authority – have both recently committed to stress testing to identify their stakeholders’ exposure to climate risk.

In today’s report, ESMA confirmed it will conduct analysis on the potential for “climate-related stress testing in different market segments”. 

It will also develop a “comprehensive analytical framework, including tools and indicators” to analyse ESG factors, climate risk and the cost of climate transition for its different entities, ESMA said.

“The framework will be broad-based and cover areas such as green bonds, social bonds, emission allowances, ESG ratings of the EU investment funds, climate-risk stress testing, and market efficiency in incentivising participants to support sustainable finance-related targets and goals,” the strategy claims. “Issues that may threaten EU market integrity (eg. greenwashing risk, illiquid/impaired markets) should be considered too,” it added.

National-level analysis may also be included in ESMA’s risk assessment, and ESG developments in each member state will be monitored to keep an eye on greenwashing risks that may be emerging – in part using data generated under MiFID II, the new green taxonomy, and securitisation records.

As well as confirming that it will be part of the Sustainable Finance Platform that will be set up by the European Commission after summer to advise on the development of the green taxonomy, ESMA will launch its own research workstream dedicated to sustainable finance.

Its next report on Trends, Risks and Vulnerabilities will include a dedicated chapter on sustainable finance, covering indicators for green bonds, ESG indices and emissions allowance trading.

“As our analysis and monitoring of ESG-related developments and risks progresses, the coverage and depth of the analysis will increase, while future TVR editions will include dedicated articles,” it concluded.