The Securities and Markets Stakeholder Group (SMSG) of ESMA issued advice related to the ESA consultation on environmental, social, and governance (ESG) disclosure standards. The draft regulatory technical standards on content, methodology, and presentation of ESG disclosures were developed under the Sustainable Finance Disclosure Regulation or SFDR. SMSG believes that the synergy between different pieces of legislation can contribute significantly to enhancing sustainability in the economy. However, neither the timing nor the concepts of these different pieces of legislation are fully synchronized or aligned with one another.
To optimally exploit this synergy, enhance effectiveness of the different pieces of legislation, and maintain simplicity, SMSG believes in the usefulness of an iterative process among these different pieces of legislation, probably for at least two to three years. This could be organized to culminate with the scheduled review of the SFDR at the end of 2022. However, to allow sufficient degree of freedom for the iterative process, SMSG suggests a phased approach with regard to the draft technical standards. With respect to the use of descriptive indicators provided in the draft technical standards, SMSG contests the use of an extended set of indicators because there will be a problem of data availability for a substantial period to come. SMSG also notes that the proposed set requires fine-tuning, which could possibly come by as a result of the iterative process. However, there is a risk that introducing these indicators in a one-off "Big Bang" seals the possibility for later adjustments.
An alternative could, for example, be to start with a much smaller core set of reference indicators to be used whenever relevant, following a comply or explain mode, while maintaining the policy indicators. Over time, this set could possibly expand. SMSG values that ESAs try to insert indicators for governance into the draft technical standards; however, it regrets that Level 1 legislation has not given them an explicit mandate to develop governance indicators. SMSG also pointed out that the definitions of particular indicators provided in the draft technical standards may have precise names, but they need to be accompanied with detailed instructions about what data need to be used to calculate these indicators. Without these instructions companies may provide financial institutions with data as seems appropriate to the companies and that would result in incomparability of data from different member states. On a conceptual level, SMSG questions the usefulness of an extended set of descriptive indicators at entity level, as the most relevant level for the investor is the product level.
SMSG believes that the relevance of individual indicators may vary depending on the type of product. However, if one allows a degree of flexibility, one should also demand transparency and disclosure regarding this flexibility. For this reason, SMSG has suggested that the field “description of policies to identify and prioritize principal adverse sustainability impacts," should disclose which criteria are used to select and prioritize indicators for adverse impact at product level and the process (governance) through which this is done. SMSG has requested ESAs and EC to provide more clarity regarding Article 8 and Article 9 products. Also, SMSG suggests ESAs should reinforce link between the Taxonomy Regulation and the SFDR with regard to sustainable investment. With regard to the use of adverse impact indicators at product level, SMSG notes that many of the concerns at the entity level are also relevant at the product level. Considering these issues, SMSG calls on ESAs to consider alternative approaches, keeping the following considerations in mind:
- Timing problems with regard to the availability of data
- Problems of materiality (relevance of indicators differs across products) and proportionality
- The need to allow an iterative process rather than seal the indicators through a “Big Bang” at too early a stage
- The need to consider qualitative considerations in the assessment of adverse impact rather than merely quantitative ones
Related Link: SMSG Advice (PDF)
Keywords: Europe, EU, Banking, Insurance, Securities, Disclosures, ESG, Climate Change Risk, Regulatory Technical Standards, Sustainable Finance, SMSG, SFDR, ESMA, ESAs
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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