On 16 May 2019, ESMA published a speech from Verena Ross, ESMA Executive Director, on transitions and challenges for European securities markets and their regulators. The speech broadly covers sustainable finance; benchmarks; and regulatory priorities for 2019. Key takeaways from the speech include:

  • in March this year, European co-legislators agreed to a Regulation on Environmental, Social and Governance (ESG) Disclosures. Under this Regulation, the European Supervisory Authorities (ESAs) are asked produce joint technical standards on the public disclosure of “principal adverse impacts” of investment decisions on sustainability factors; product specific disclosure showing how products fulfil environmental or social characteristics; and how to market sustainable investments;
  • the ESAs will coordinate work with each other to produce the requested draft technical standards. The vast majority of the technical standards must be delivered within 12 months of entry into force of the Regulation, which is expected during or just after the summer;
  • agreement was reached by EU co-legislators on a Regulation on low-carbon benchmarks in February. This creates: the EU climate transition benchmark which brings the resulting benchmark portfolio on a decarbonisation trajectory; and the EU Paris-aligned benchmark which brings the resulting benchmark portfolio’s carbon emissions in line with the Paris Climate Agreement goal to limit the global temperature rise to 1.5C° compared to pre-industrial level;
  • for the new benchmarks, the European Commission has mandated an industry-led expert group to define certain requirements such as the methodology, weighting method of the underlying assets, and the criteria for the choice of the underlying assets;
  • following the agreement of the low carbon benchmarks legislative package, the ESG disclosure will not be limited to these two new benchmarks. All benchmarks, within their benchmark statement, should disclose whether they pursue ESG objectives. As such, as of 31 December 2021, all benchmarks except for interest rate and currency benchmarks should include information on their degree of alignment with the Paris Agreement;
  • all benchmarks used in the EU and their administrators are by the end of 2020, at the latest, required to fully comply with the BMR. However, as part of the political agreement on low carbon benchmarks, a longer transitional period of an additional two years has been granted for benchmarks provided outside the EU and for those benchmarks classified as critical in the EU;
  • EONIA in its current form will not become BMR compliant, given the lack of underlying transactions and high concentration of volumes by only a few contributors. Therefore, unless its methodology is improved, EONIA can no longer be used in new contracts as of the new end of the transition period, i.e. as of 1 January 2022;
  • EURIBOR could become BMR compliant by moving to the EURIBOR hybrid methodology. This new methodology would strengthen EURIBOR by bringing in transaction data and is currently under implementation, with a plan to finalise it in the second half of 2019; and
  • sound contingency planning needs to remain high on firms’ agendas. Given the significant levels of uncertainty remaining around the exact shape, timing and impact of Brexit, it is important for firms to remain diligent to best manage the transition to a post-Brexit environment. Memoranda of Understanding have been put in place to address the core concerns of access of EU counterparties to UK post-trade infrastructure in the case of a ‘no-deal’ Brexit, and the risk of delegation of investment and risk management activities from EU entities to UK entities being prohibited.