The EU securities markets watchdog has identified tackling greenwashing and promoting transparency as one of three priorities for its sustainable finance work over the next three years.

The other priority areas, which ESMA said are all closely interrelated, are building national regulators’ and ESMA’s capacities in the sustainable finance field; and monitoring, assessing and analysing ESG markets and risks.

This is the first time ESMA has produced a sustainable finance roadmap, although for 2020 it set out a sustainable finance strategy.

The roadmap builds on the objectives in that strategy, taking into account that the European Commission and the co-legislators had “further accelerated the development of EU initiatives on sustainable finance” and that markets for new sustainable financial products emerged and existing markets continued to grow.

ESMA said it would address its three priorities with actions across several sectors: investment management, investment services, issuers’ disclosure and governance, benchmarks, credit and ESG ratings, trading and post-trading, and financial innovation.

On greenwashing, ESMA said it was a “complex and multifaceted issue”, with its causes potentially relating to multiple aspects of the functioning of the investment value chain.

Alluding to problems with the sequencing and implementation of sustainable finance rules developed by the EU it said that, in an ideal scenario, it and national regulators would tackle greenwashing “based on a complete and fully applicable legislative regime setting the boundaries of the type of market behaviour and practices that are and are not permissible” but that there was “a real need to address greenwashing without delay, even if all the legislative steppingstones are not fully in place yet”.

Derek Lawlor, an Ireland-based financial services regulatory partner at law firm Simmons & Simmons, said tackling greenwashing was clearly the most prominent of ESMA’s three priorities.

He added: “It is interesting to note that the roadmap acknowledges that while greenwashing as a general term has an intuitive meaning, there is no common understanding of what it is, and that the specifics of greenwashing risk will vary between asset management, investment services, corporate disclosures and benchmarks.”

SFDR understanding key

Types of action that ESMA indicated it is planning to take to tackle greenwashing include organising “case discussions” focused on greenwashing issues among national regulators to establish a shared understanding of key concepts.

verena ross esma

Verena Ross, chair of ESMA

The publication of ESMA’s roadmap comes amid concerns about a diversity in the interpretation and application of sustainable finance rules, such as the Sustainable Finance Disclosure Regulation (SFDR).

ESMA said a shared regulatory understanding of the new rules under the SFDR and how to identify and addressing greenwashing under this regime was “an essential starting point for more advanced supervisory convergence work related to greenwashing”.

Providing guidance to the market and national regulators on how to apply various sustainable finance rules is another category of actions ESMA said it planned to take.

The watchdog also revealed that it would be launching a new “consultative working group” supporting ESMA’s coordination network on sustainability, and that it and the other European supervisory authorities are due to receive a specific mandate from the Commission with respect to greenwashing objectives.

Other intended actions flagged by ESMA include undertaking climate scenario analysis for investment funds.

With regard to the SFDR, it said it would review the regulatory technical standards to clarify indicators for climate and environmental-related principal adverse impacts (PAIs) and PAIs on social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

“Advancing the sustainability agenda is crucial for ESMA, particularly as investor preferences shift to environmentally friendly financial products and the European Union strives to meet its commitments on tackling climate change,” said Verena Ross, chair of the watchdog.

“The Roadmap is a milestone for our sustainable finance work, identifying the priority work we will do to ensure that ESMA and national supervisors take ambitious action on priority sustainable finance issues.”

“I am confident that ESMA’s actions will play a key role in contributing to the European Green Deal and in protecting European investors on this journey.”

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