The European Securities and Markets Authority (ESMA) has published its technical advice to the European Commission (EC) on sustainable finance initiatives to support the EC’s Sustainability Action Plan in the areas of investment services and investment funds regulated under MiFID II, AIFMD, and the UCITS Directive.
The aims of integrating sustainability risks and factors are to: reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth; assess and manage relevant financial risks stemming from climate change, resource depletion, environmental degradation and social issues; and foster transparency and long-termism in financial and economic activity.
To ensure consistency, ESMA developed its final report in cooperation with the European Insurance and Occupational Pensions Authority (EIOPA), which has received a similar mandate regarding Solvency II and the Insurance Distribution Directive (IDD).
ESMA ran a public consultation and hearing on its technical proposals and conducted a cost-benefit-analysis and has taken into account the opinion of the Securities Markets Stakeholder Group (SMSG). ESMA received 69 responses, two of which on a confidential basis, as well as advice from the Securities and Markets Stakeholder Group’s (SMSG). The responses to the public consultation and the SMSG included some general comments that are summarized below:
Overall, a majority of respondents agreed with ESMA’s principled-based approach to integrating sustainability risks and factors in MiFID II since a more prescriptive regulatory approach for such a dynamic area might run the risk of stifling innovation or creating regulatory inconsistencies. The SMSG on this topic stated that it “supports the view taken by ESMA in its presentation of the Approach to the Commission’s request that the integration of sustainability risks and factors is better done through a high-level principles-based approach for the reasons explained in the CPs. The SMSG is keen to see this approach reflected in the specific wording that would be used to amend the existing regulations.”
Various respondents noted that concepts and terms relating to environmental, social, and governance matters should be clearly defined. Respondents noted that some definitions are included in the Commission’s amendments to the MiFID Delegated Regulation, which were drafted in parallel to ESMA’s CP. However, these respondents highlighted the absence of a common definition for important concepts such as ‘sustainability risks’. These respondents underlined the importance to have a shared understanding of terms such as this in order for firms to understand how these proposed amendments would work in practice. On this topic, the SMSG stated that “the lack of agreed definitions and labels at the EU level is a substantial shortcoming and seriously hampers the implementation of a harmonized approach on sustainable finance. This should not prevent firms from making progress in order to incorporate sustainability risks and factors, but this should be taken into account by regulators and supervisors.”
In response, ESMA said it agrees with the importance of having clarity on the terminology used for the correct implementation of the new requirements. ESMA also believes that the development of any binding definitions needs to consider all legislative initiatives developed on the topic of sustainable finance in order ensure a harmonized approach across sectors. For this reason, and also in light of the content of the mandate received, ESMA has refrained from suggesting new definitions in its draft technical advice, but noted that definitions on these topics are indeed included in the new rules on sustainability-related disclosure requirements related to sustainable investments and sustainability risks on which the co-legislators have recently reached political agreement.
Next steps: ESMA’s initial consultation contained a separate paper on guidelines for disclosure requirements applicable to credit ratings, including the consideration of environmental, social and governance factors. The final report of this paper is expected to be published by the end of July.