ESMA Sets Sustainable Finance Priorities, to Conduct Stress Testing
The European Securities and Markets Authority (ESMA) published the Sustainable Finance Roadmap for 2022-2024. The roadmap, which is built on the 2020 Strategy on Sustainable Finance, sets out sustainable finance deliverables for ESMA and how these will be implemented over the next three years. The three broad priorities set out in the roadmap are addressing greenwashing; building supervisory capacity at ESMA and the national competent authorities; and monitoring, assessing, and analyzing ESG markets and risks. As part of its work, ESMA plans to conduct regular climate change stress testing of entities it regulates and will soon launch a call for stakeholders to join its new Consultative Working Group for Coordination Network on Sustainability.
To address the three priorities in the roadmap, ESMA sets out a comprehensive list of actions and deliverables across these areas: cross-sectoral initiatives, investment management, investment services, issuer disclosure and governance, benchmarks, credit and ESG ratings, trading and post-trading, and financial innovation. The list of actions and deliverables are accompanied by an indicative timeline, which is provided in the Annex of the roadmap. Below are the key highlights of the focus areas outlined in the sustainable finance roadmap:
- Assess greenwashing market practices, conduct supervisory case discussions on greenwashing among the national competent authorities, contribute to consistency of sustainable finance legislation, and contribute to the European Commission's efforts to develop European Union-wide labels for sustainable finance products
- Contribute to European Commission's work on minimum sustainability criteria for the Sustainable Finance Disclosure Regulation (SFDR) Article 8 products, review SFDR regulatory technical standards, contribute to consistent implementation of new requirements through supervisory convergence actions, and undertake work on climate change scenario analysis
- Contribute to consistent implementation of new or existing requirements related to manufacturing and design of environmental, social, and governance (ESG) products, information provided on ESG products as well as their marketing and distribution, consider implications for ESMA of the plans of European Commission on sustainable finance related data under the European Data Strategy to support small and medium-size enterprises and retail investors, and collect data on distribution of ESG products
- Contribute to the European Union and international sustainability reporting standards, contribute to legislative process on sustainable corporate governance and the Corporate Sustainability Reporting Directive II, contribute to assessment of how IFRS reflect sustainability risks, provide guidance on Taxonomy Regulation Article 8 Delegated Act, and prepare for supervisory powers over external reviewers for green bond issuances
- Contribute to the European Commission's work on aligning Climate Transition Benchmarks and Paris-Aligned Benchmarks with the European Union Taxonomy, contribute to the European Commission assessment of possibility to create ESG benchmark label, monitor trends in the use of climate benchmarks, and build supervisory capacities on ESG compliance of critical/third country benchmark administrators
- Support EC in improving reliability and comparability of ESG ratings and assess how credit rating agencies incorporate ESG factors in their methodologies
- Build analytical tools for monitoring carbon markets in European Union, contribute to consistent implementation of new requirements, identify use cases of innovative technologies that could help the transition to a greener economy, collect evidence on recent trends and interactions in relation to green fintech and sandboxes
As part of the work on climate change scenario analysis, ESMA plans to develop methods, parameters, and scenarios for bottom-up climate change stress testing to be used by supervisors and supervised entities (in coordination with the European Banking Authority, or EBA, and the European Insurance and Occupational Pensions Authority or EIOPA). As a one-off exercise, ESMA plans to conduct climate change stress test to assess the resilience of investment funds in line with the Fit-for-55 package (in coordination with the EBA and EIOPA) and to perform regular climate change stress tests or scenario analyses of entities within the ESMA remit. Leveraging on the data-analytical capabilities that already exist in other areas of capital markets legislation, it will be key to engage in activities such as climate scenario analysis for investment funds, central counterparty stress testing, and establishing common methodologies for climate-related risk analysis with the other European agencies and international standard-setting bodies. In this context, regtech and suptech solutions may further facilitate access to consolidation and usage of structured and unstructured ESG data by national competent authorities and ESMA.
Related Links
Keywords: Europe, EU, Banking, Securities, Sustainable Finance, ESG, Greenwashing, Disclosures, Roadmap, Insurance, Climate Change Risk, Reporting, Stress Testing, Scenario Analysis, Regtech, Suptech, EBA, EIOPA, EC, ESMA, Headline
Featured Experts
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Laurent Birade
Advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices.
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Previous Article
SARB Issues Directive on Liquidity Coverage RatioRelated Articles
ISSB Sustainability Standards Expected to Become Global Baseline
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
IOSCO, BIS, and FSB to Intensify Focus on Decentralized Finance
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
BCBS Assesses NSFR and Large Exposures Rules in US
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.
Global Agencies Focus on ESG Data, Climate Litigation and Nature Risks
At the global level, supervisory efforts are increasingly focused on addressing climate risks via better quality data and innovative use of technologies such as generative artificial intelligence (AI) and blockchain.
ISSB Standards Shine Spotlight on Comparability of ESG Disclosures
The finalization of the IFRS sustainability disclosure standards in late June 2023 has brought to the forefront the themes of the harmonization of sustainability disclosures
EBA Issues Several Regulatory and Reporting Updates for Banks
The European Banking Authority (EBA) recently issued several regulatory publications impacting the banking sector.
BCBS Proposes to Revise Core Principles for Banking Supervision
The Basel Committee on Banking Supervision (BCBS) launched a consultation on revisions to the core principles for effective banking supervision, with the comment period ending on October 06, 2023.
US Proposes Final Basel Rules, Transition Period to Start in July 2025
The U.S. banking agencies (FDIC, FED, and OCC) recently proposed rules implementing the final Basel III reforms, also known as the Basel III Endgame.
FSB Report Outlines Next Steps for Climate Risk Roadmap
The Financial Stability Board (FSB) recently published the second annual progress report on the July 2021 roadmap to address climate-related financial risks.
EBA Plans on Ad-hoc ESG Data Collection and Climate Scenario Exercise
The recognition of climate change as a systemic risk to the global economy has further intensified regulatory and supervisory focus on monitoring of the environmental, social, and governance (ESG) risks.
