ESMA published advice from the Securities and Markets Stakeholders Group (or the Stakeholder Group) to the ESAs on the proposed regulatory technical standards on the content and presentation of information in context of the regulation on sustainability‐related disclosures in the financial services sector (Regulation 2019/2088). By introducing the Taxonomy Regulation’s Environmentally Sustainable Activities into the Sustainable Finance Disclosure Regulation, another piece of the puzzle is completed. Although the Group welcomes this, it remains worried about the complexity of the proposals, to a large extent resulting from piecemeal implementation of different sets of level 1 legislation, and offers suggestions for simplification. The Group also supports the ESA approach to amend the existing draft regulatory technical standards, instead of drafting a new set of regulatory standards.
The Stakeholders Group believes that the synergy between different pieces of legislation—particularly the Non-Financial Reporting Directive (NFRD), the Taxonomy Regulation, and the Sustainable Finance Disclosure Regulation (SFDR)—and also adjacent legislation such as the Shareholders Rights Directive II and the scheduled reviews of MiFID and UCITS/AIFMD can contribute significantly to enhancing sustainability in the economy. However, neither the timings nor the concepts of these different pieces of legislation are fully aligned with one another. To reduce complexity, within the confines of Level 1 legislation, the Group suggested some subtle wording change, avoidance of duplication in questions, and clarifications with regard to the indicators. The following are the key highlights of the advice from the Stakeholder Group:
- Although the Group supports the ESA approach to amend the existing draft regulatory technical standards, this raises the question of the implementation date of requirements provided by these amended regulatory technical standards. The implementation date should consider the timeline of green asset ratio reporting under Article 8 of the Taxonomy regulation (which is planned in first quarter of 2022), as it would allow market participants to use reliable data from issuers. This will help ensure that clients will benefit from correct and consistent information.
- The Group believes that derivatives can serve many purposes, including ESG purposes. In such contexts, the Key Performance Indicator (KPI) can be extended to include derivatives, provided that it is adequately disclosed how they serve ESG purposes. On the issue of the KPI indicator, the Group is worried that the KPI tells only part of the story. Therefore, some instruments cannot be included (example sovereign bonds): social objectives are not yet included. The Group is also concerned that in the perception of the investor, the KPI gets undue prominence. For this reason, the Group supports an approach where the denominator excludes instruments that are not in scope of the Taxonomy Regulation. However, this should be complemented by another indicator that indicates the potential coverage of the Taxonomy Regulation.
- The Group believes that assessment by a third party would be useful. However, due to data problems and methodological challenges, it is reasonable to assume that in the beginning, financial companies will be on a learning curve. Thus, such assessment should be of an advisory, rather than a compliance nature at first. The Group also believes that the responsibility of the data on the investee companies rests with the investee companies themselves. This is something that should be provided for in the Corporate Sustainability Reporting Directive. It is likely that not only companies, but also the national competent authorities will be on a learning curve. For this reason, the Group proposes that the implementation of this legislation should be a prime focus of regulatory convergence.
- The Group also suggests that questions by financial institutions be primarily answered through ESMA Q&A, rather than bilaterally with national competent authorities.
Related Link: ESMA Advice (PDF)
Keywords: Europe, EU, Banking, Securities, Sustainable Finance, Disclosures, Regulatory Technical Standards, SFDR, Taxonomy Regulation, ESG, SMSG, Climate Change Risk, NFRD, ESMA
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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