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The European Securities and Markets Authority (“ESMA”) recently published an opinion reflecting its long-term vision on the Sustainable Finance Regulatory Framework (the “Opinion”). The Opinion provides suggestions, proposals for amendments, and insights on the current challenges of the regulatory framework applicable to sustainable finance (the “Framework”).

According to ESMA, the Framework aims to ensure financial systems can support sustainability and the transition and promote interoperability at the EU level. ESMA sets the context of the Framework as a fast-evolving process, supporting the mobilization of private capital into sustainable investments, while being aligned with the EU target of climate neutrality by 2050 and the reduction of greenhouse gas target. The general observation is also that the Framework is ensuring the investors make effective and informed decisions.

However, the Opinion underlines that ESMA and the national competent authorities are of the view that the Framework could further mature to facilitate investors’ access to sustainable investments and improve its usability and coherence throughout the sustainable investment value chain. Main areas include:

1) Focus on customer and industry testing

First, ESMA highlights the importance of customer testing in the policies’ process, to seek better-suited solutions for retail investors, while taking into consideration the industry’s input to assess the feasibility of potential solutions.

2) The EU Taxonomy as a central point of the Framework

ESMA also confirms that the EU Taxonomy should be the sole reference for the assessment of sustainability to promote convergence and ensure comparability for investors. An extension of the EU Taxonomy is also seen as beneficial, including the reflection around the creation of a ‘social’ Taxonomy.

3) The Framework as a means to effectively support the transition

The Opinion underlines that the Framework should be used to effectively support the transition. In that respect, ESMA suggests providing a legal definition of “transition investments” to provide support for the creation of transition-related products with legal clarity.

4) Enhanced transparency requirements

ESMA supports key improvements in sustainability-related disclosures, suggesting that all financial products should be subject to minimum reporting requirements, regardless of the sustainability ambition of the product, to enhance transparency and comparability.

5) Implementation of a product categorization system

Confirming the ESAs’ opinion on SFDR, ESMA recommends the implementation of a categorization system, in particular for products offered to retail investors. This system would include two categories:

• A sustainable investment category, based on Taxonomy and taking into consideration the ‘Do not significantly Harm’ criteria; and

• A transition investment category, oriented towards ‘transition-minded’ investors.

The categories should be based on clear eligibility criteria and binding transparent obligations. In addition, ESMA foresees a complementary grading system that would help investors identify products compatible with their sustainability preferences and compare them.

6) ESG data quality

The Opinion underlines the necessity for high-quality ESG data to ensure comparability and reliability, stating that the gap could be filled by the application of the European Sustainability Reporting Standards.

7) Conduct of sustainable investment value chain (the “SIVC”) actors

ESMA is finally urging more responsibility regarding the conduct of SIVC actors, which should have an active engagement to ensure the proper functioning of the Framework, and to fight against greenwashing.

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