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Strategy on Sustainable Finance 2020: ESMA sets out its plans for more sustainable financial markets

Strategy on Sustainable Finance 2020: ESMA sets out its plans for more sustainable financial markets
  • United Kingdom
  • Financial services and markets regulation - ESG
  • Financial services



The European Securities and Markets Authority (ESMA) published its ‘Strategy on Sustainable Finance’ (the ‘Strategy’) on 6 February 2020. In the Strategy, ESMA sets out how it plans to re-orientate itself in the coming decade by placing sustainability at the core of its ongoing regulatory activity, ethos and plans for the future.  ESMA’s announcement fits into a general trend across Europe, as legislators, markets and regulatory bodies try to take more account of Environmental, Social and Governance (ESG) concerns.

While ESMA commits to internal reform, the Strategy recognises that it will need to look to other organisations if it hopes to make financial markets more sustainable. This will mean cooperating with climate working groups and harmonising supervisory practice across the EU. We summarise and review the key elements of ESMA’s Strategy in the briefing below.

The Strategy has also set out an indicative timeline for ESMA’s actions on sustainable finance. We discuss what this proposed timeline means for affected firms and take note where measures – like the ‘climate-related stress tests’ – are omitted from ESMA’s current roadmap.


The publication of the Strategy was prompted at least in part by two EU Regulations:

  • Regulation (EU) 2016/2341, issued in late 2019, which covers ESG disclosure (the ‘Disclosure Regulation’)[1]; and
  • the upcoming Regulation (COM) 2018/353, a proposed Regulation which will cover “the establishment of a framework to facilitate sustainable investment” (the ‘Taxonomy Regulation’).

However, this move can also be placed in a wider context, as set out in the Introduction to the Strategy. The European Union is one of the parties that adopted the Paris Agreement on climate change and the UN 2030 Agenda for Sustainable Development in 2015, and ESMA’s Strategy sets out how the regulator can contribute to meeting the EU’s commitments. More recently, ESG looks set to rise in prominence in the wake of COVID-19. While the ‘E’ (environment) in ESG has traditionally received the most attention and will continue to be a focus as the world pivots to confront a longer term threat, social and governance issues are likely to rise in prominence in the wake of this pandemic.

Internal Reform

The Disclosure and Taxonomy Regulations: New technical standards

As the Strategy notes, one of ESMA’s “key priorities” for 2020 is the implementation of the Disclosure Regulation. Issued in late 2019, the Disclosure Regulation introduced new ESG disclosure requirements for financial market participants and financial advisers. It also governs how these firms integrate ESG factors into their investment decisions (you can read more in our briefing). Most of the requirements set out in the Disclosure Regulation take effect in March 2021, with the Regulation due to take full effect in December 2022 and ESMA is currently working with both the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) on a new regulatory framework (a draft document was issued in April of 2020). According to the Strategy’s indicative timeline, we can expect the first technical guidelines to be issued by mid-2020.

The Strategy also makes reference to further disclosure requirements which look set to be introduced under the upcoming Taxonomy Regulation. As drafted, these new requirements would apply to firms offering ‘financial products as environmentally sustainable investments or as investments having similar characteristics’. ESMA is already working on the accompanying technical guidelines, which are scheduled to be issued in stages between 2020 and 2021.

Looking forward, ESMA has also stated that (where relevant) ESG consideration will be taken into account when developing or updating all its technical standards, even where these standards fall outside the specific remit of sustainable finance.

Tracking ESG and a dedicated chapter in the TRV

ESMA’s 2020 Report on Trends, Risks and Vulnerabilities and (TRV) contains a new chapter on sustainable finance, which will now feature in all upcoming editions. Along with a general increase to the depth and scope of ESG analysis, the chapter features new indices being developed by ESMA to track ESG market developments. Where possible, ESMA has indicated that it will track these indices on both a national and a European level. ESMA expects to draw on existing regulatory data (furnished by MIFID II and EMIR), commercial data and public records to create these new metrics. However, the Strategy notes that the upcoming Taxonomy Regulation should significantly improve the available pool of ESG data.

Regulation (EU) 2019/2089 (the ‘Low Carbon Benchmarks Regulation’) will also play a major role moving forward. Published in the Official Journal on 9 December 2019 and having entered into force on 10 December 2019, the Low Carbon Benchmarks Regulation amends Regulation (EU) 2016/1011 (the ‘Benchmarks Regulation’) with the aim of increasing transparency and uniformity in the use of low-carbon indices. Obligations under the Regulation take effect at different times. Most apply from 20 April 2020, while certain additional obligations apply from 31 December 2022. You can read more in our briefing on this subject.

Along with the dedicated chapter, ESMA’s future TRV editions are expected to feature stand-alone articles, promoting research on relevant ESG topics.

ESG and credit ratings

According to the Strategy, 2020 should see the implementation of  ESMA’s Guidelines on disclosure practices for credit rating agencies (CRAs). There are currently no ESG factors or sustainability characteristics in the underlying legal frameworks for CRAs under ESMA’s direct supervision, an issue the new guidelines aim to address through the introduction of new transparency requirements. Though the use of these disclosures, ESMA hopes to determine and monitor the influence ESG factors have on credit ratings. These new requirements are expected to be incorporated into ongoing CRA supervision in the first half of 2020.

Training, research and climate related-stress tests?

As part of its commitment to take more account of ESG concerns, ESMA will be incorporating ESG into its training courses, launching new research workstreams and conducting more analysis to evaluate the risks posed by climate change. “Climate-related stress testing for certain market segments” were put forward as a possible regulatory tool within this wider umbrella of measures. However, there are few accompanying details and only the new ESG training regime (expected by mid-2020) is plotted on the Strategy’s indicative timeline.

Reaching out

Enhanced cooperation

The Strategy acknowledges that in order to achieve its goals, ESMA will have to cooperate with other national and international authorities. ESMA has already established a Coordination Network on Sustainability, a consultative body composed of experts from national competent authorities and ESMA staff. In addition, ESMA is expected to play a role on the new Sustainable Finance Platform, a group which will be created by the Taxonomy Regulation to monitor capital flows to sustainable finance.

Enhanced oversight: coordinating NCAs

The Strategy describes the outlook for sustainable finance at a national level as “heterogenous”. In other words, the picture is mixed at best and ESMA feels that more should be done to promote ESG concerns on a national level. To this end, ESMA has already begun mapping national supervisory practices and the regulator expects to build on this work in 2020 by fostering awareness amongst National Competent Authorities (NCAs). ESMA-led ESG-focussed training sessions for key NCA personnel are scheduled to begin in 2021. The data gathered for national ESG indices (see ‘Tracking ESG’ above) is also likely to provide useful ammunition for ESMA as it pushes for action at the national level.

ESMA has focussed particular attention on mitigating the risks of “greenwashing and preventing mis-selling practices or misrepresentations” and it is keen to encourage NCAs to harmonise supervisory oversight in these areas. ESMA has indicated that it will issue new guidelines to this effect. However, this is unlikely to result in a standalone convergence exercise. Instead ESMA has implied that ESG considerations will be incorporated into existing supervisory convergence tools as they are updated in the future

[1] We tackle this topic in more depth in our dedicated briefing on the subject.