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- ESMA supports using the EU Taxonomy as the exclusive source of sustainability information.
- Suggests better financial product classification and transparency.
- Demands policy consumer testing and regulation of ESG data goods.
An opinion on improving the Sustainable Finance Regulatory Framework has been released by the European Securities and Markets Authority (ESMA), outlining possible long-term reforms.
Current Framework
ESMA notes the EU Sustainable Finance Framework’s strong progress and the protections it now has against greenwashing. To strengthen the Sustainable Investment Value Chain and make sustainable investments easier for investors to access, ESMA does, however, have more improvements in mind.
Key Recommendations:
EU Taxonomy as the Sole Reference: “All Sustainable Finance legislation should incorporate the EU Taxonomy as the exclusive, universal framework for evaluating sustainability,” declared ESMA. This would bring uniformity to all sustainability evaluations.
Complete and Develop Taxonomies:For all actions that contribute to environmental sustainability, ESMA suggests creating a social taxonomy and finishing the EU Taxonomy. By using a thorough approach, all important activities are addressed.
Define Transition Investments: It is important to provide a precise description of transition investments. In order to promote the development of transition-related goods and offer legal certainty, ESMA stated that a definition of transition investments has to be included in the Framework. This would encourage the creation of goods meant to aid in the shift to sustainable practices.
Enhanced Disclosure Requirements: Basic sustainability information, including social and environmental aspects, should be disclosed for all financial instruments. By doing this, investors will be able to make more informed judgments and there will be more openness.
Product Categorization System: According to ESMA, a system for classifying items according to sustainability and transition criteria should be implemented. This system would enforce transparency requirements and depend on well-defined eligibility conditions.
Regulation of ESG Data Products: According to ESMA, “the consistency of ESG metrics should be improved, the reliability of estimates should be ensured, and ESG data products should be brought within the regulatory perimeter.” The legitimacy and consistency of ESG indicators would be improved by regulating these items.
Consumer and Industry Testing: To guarantee viability and suitability for retail investors, ESMA advises carrying out extensive consumer and industry testing prior to policy implementation. This methodology would provide customization of responses to practical requirements and obstacles.