ESMA Recommends Sustainability Disclosure Requirements for All Financial Products

The recommendations include implementation requirements for basic sustainability disclosures for all financial products, regulating ESG data products, and the establishment of categories for sustainable and transition investment products. ESMA’s recommendations follow the launch last year by the European Commission of a comprehensive review of the Sustainable Finance Disclosure Regulation (SFDR) framework. In its publication, ESMA acknowledged that considerable progress has been achieved in building the EU Sustainable Finance regulatory framework but noted that their remains further room for the evolution and maturation of the framework. 

 

Key Recommendations by ESMA

One of the key recommendations provided by ESMA is for the implementation of minimum sustainability disclosure requirements for all financial products, including those that do not have stated sustainability ambitions, which the regulator said would serve to improve transparency and facilitate comparability between financial products. This while allowing comparability between products with an ESG objective, products with smaller ambition and products without such ambitions.

ESMA noted that the minimum disclosures could consist of a small number of sustainability metrics in the form of KPIs covering basic environmental and social indicators, such as greenhouse gas emissions, impact on biodiversity, human rights, labour rights, and Taxonomy-alignment. It should also be noted that, while new regulations such as the CSRD will help enhance transparency on sustainability issues for investors, market participants will continue to rely on ESG data providers for information, particularly for companies not in the scope of the CSRD, leading to a need to ensure the quality of ESG data products.

In this regard, the regulator recommends bringing ESG data products into the regulatory perimeter in order to ensure that data is reliable and comparable, with the regulatory regime defining the duties and responsibilities of ESG data providers, and setting out disclosure, conflict of interest and quality requirements. ESMA also provided a series of recommendations aimed at enabling the supervisory framework to help support the transition to a sustainable economy. These recommendations include having companies provide information on the share of revenue and capital expenditure associated with harmful activities that are in a transition trajectory or are decommissioning and incorporating a definition of transition investments into the framework to help support the creation of transition-related products, as well as creating EU labels for transition bonds, based on the recent adoption of the EU Green Bond Standard.
 

Introduction of a Product Categorisation System

ESMA also recommends the establishment of a product categorisation system for sustainable and transition investments, to help investors understand financial products’ sustainability characteristics and simplify product selection. Key parts of the recommended categorization system would include science-based and measurable eligibility criteria for each category, and transparency obligations that will apply to the products. The document also aims to establish the EU Taxonomy as the sole reference point to be used to assess and measure sustainability performance, noting that the SFDR which predates the Taxonomy provides its own, more flexible, definition of sustainable investments. ESMA recommends completing the Taxonomy to cover all the economic activities that could substantially contribute to the EU environmental objectives, be extended to cover transition activities, and that a social taxonomy be developed.
 

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