ESMA opinion on the functioning of the Sustainable Finance Framework

On 24 July 2024, the European Securities and Markets Authority (ESMA) set out an opinion on the functioning of the EU Sustainable Finance Framework, setting out possible long-term improvements. The opinion is the last component of ESMA’s reply to the European Commission’s request for input related to greenwashing, next to the final report on greenwashing.

In summary the main recommendations of the opinion include:

  • The EU Taxonomy should become the sole, common reference point for the assessment of sustainability and should be embedded in all Sustainable Finance legislation.
  • The EU Taxonomy should be completed for all activities that can substantially contribute to environmental sustainability and a social taxonomy developed.
  • The Sustainable Finance Disclosure Regulation definition of ‘sustainable investments’ should be phased out.
  • A definition of transition investments should be incorporated into the Framework to provide legal clarity and support the creation of transition-related products.
  • All financial products should disclose some minimum basic sustainability information, covering environmental and social characteristics.
  • A product categorisation system should be introduced catering to sustainability and transition, based on a set of clear eligibility criteria and binding transparency obligations.
  • ESG data products should be brought into the regulatory perimeter, the consistency of ESG metrics continue to be improved, reliability of estimates ensured.
  • Consumer and industry testing should be carried out before implementing policy solutions to ensure their feasibility and appropriateness for retail investors.
  • ESMA is of the view that the Commission could consider putting in place a stewardship code at EU level that would apply to asset managers and institutional investors but also other market actors such as benchmark administrators and investment service providers, leveraging off existing stewardship codes in other jurisdictions.