Background
On 24 July 2024 ESMA published an Opinion titled “Sustainable investments: Facilitating the investor journey”.
Key points
- Retail investor-friendly disclosure regime: ESMA stresses the importance of high-quality disclosures and the need for market participants to maintain good conduct, thereby fostering an environment of trust and facilitating the investor journey, particularly for retail investors. In this regard, the EU Sustainable Finance regulatory framework (“Framework”) should simplify and clarify sustainability-related disclosures, allowing for better comparability and informed decision-making.
Specifically, ESMA has noted the following regarding disclosures:
- Sustainability disclosures could be into two distinct categories. The first category includes "vital" information tailored for retail investors, which should be presented in a simplified format and straightforward language akin to the Key Information Document (KID) under the PRIIPs Regulation. The second category encompasses a more comprehensive set of sustainability information accessible to both retail and professional investors. ESMA raises the question of whether the “vital” or “key information” piece should also be mandatory for professional investors, noting that the PRIIPs KID currently is not.
- It has proposed the establishment of a product categorisation system specifically targeting sustainable and transition investments. This system would include minimum criteria and transparency obligations, aimed primarily at ensuring clear communication with retail investors. ESMA believes that the adoption of these categories could be voluntary rather than mandatory, allowing flexibility for fund managers while still promoting transparency and investor protection.
- ESMA also reiterates importance of aligning product names and marketing materials with the actual sustainability profile of the financial products. This recommendation aligns with the recently published “ESMA Guidelines on funds' names using ESG or sustainability-related terms.”
- Role of the EU Taxonomy: ESMA proposes that the EU Taxonomy should serve as the primary reference point for assessing sustainability. It suggests phasing out the SFDR's existing definition of sustainable investments contained in Article 2(17) in favour of the EU Taxonomy, which would standardise assessments and reduce greenwashing risks. Furthermore, ESMA calls for the completion of the EU Taxonomy, including the development of a social taxonomy. As an interim measure, ESMA suggests making the key parameters of a sustainable investment under SFDR more prescriptive to foster comparability and combat greenwashing.
- Addressing transition investments: ESMA highlights the necessity of defining and supporting transition investments. It recommends enhancing disclosures related to activities in transition or decommissioning due to their environmental impact. This would help align financial products with the EU's environmental objectives and ensure consistency across various EU legal texts.
- Consumer and industry testing: To ensure the practicality and effectiveness of proposed changes, ESMA advises conducting consumer and industry testing. This approach would validate that policy solutions meet the needs of retail investors and are feasible for financial market participants to implement.
Next steps
While the Opinion focuses on providing a high-level vision for the future development of the framework, rather than detailing specific forthcoming actions, it may be influential when it comes to the European Commission’s review of SFDR.
As a reminder, proposed amendments to the RTS under SFDR were focused on PAI disclosures and financial products’ decarbonization targets. Following consultations, the ESAs had proposed an expansion of social PAI indicators, modified PAI disclosure frameworks, and added greenhouse gas emission reduction targets. Consumer feedback also led to improved financial product templates, including a new summary dashboard. The ESAs had also proposed minor technical amendments to enhance disclosures related to sustainable investments and harmonize calculations. Endorsement was expected in March 2024, with implementation by 2025. However, this has been delayed, with little clarity as regards an updated timeline.
Do not hesitate to contact our ESG Legal Team should you have any questions on the above or require further guidance.
