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November 2, 2022

Esma announces sustainability and tech-focused strategy

The EU regulator’s plans show a commitment to quell greenwashing and make use of data in order to maintain strict oversight of the bloc.

In October, the European Securities and Markets Authority published its strategy for 2023–2028, detailing the three priorities and two thematic drivers that will shape its response to future challenges. These include strengthening financial stability, market supervision and the protection of retail investors, while focusing on sustainable finance and technological innovation and the use of data.

The regulator’s strategy has been broadly welcomed by market participants, particularly as it seeks to ‘embed’ issues of sustainability across its operations, and accelerate the use of data in financial market supervision.

Verena Ross, Esma’s chair, highlighted these developments when the strategy first launched: “The Esma strategy takes into account the rapidly changing market and geopolitical developments. The established strategic goals are important to enable Esma to continue to achieve its mission to enhance investor protection [and] promote orderly and stable financial markets […].The key twin drivers of sustainability and technological and data innovation are also now embedded across all areas of the organisation.”

Voluntary carbon markets

In terms of sustainability, Esma’s priorities build on, and align with, a number of upcoming changes to the EU’s financial market rulebook. For one, this could include updates to the way that voluntary carbon markets (VCM) are regulated in the bloc.

Although no direct reference is made to this in Esma’s strategy, the authority indicated that its approach for the next five years goes “hand in hand” with its Sustainable Finance Roadmap 2022-2024, published in February. This roadmap underscores Esma’s commitment to “enhance its monitoring of developments in the EU carbon markets”.

At present, the EU operates a mandatory, regulated Emissions Trading Scheme, while the voluntary carbon market remains, for the most part, unregulated. One exception concerns voluntary carbon credit derivatives, which could be deemed a financial instrument in certain circumstances, under the second iteration of the Markets in Financial Instruments Directive (or MiFID II) and European Market Infrastructure Regulation rules, according to research from the International Swaps and Derivatives Association.

But a European Commission public consultation on the certification of carbon removals, that includes the voluntary market, is expected to lead to new EU-wide rules by the end of 2022. This framework will establish procedures to “monitor, report and verify” the authenticity of carbon removals.

Coupled with Esma’s strategic emphasis on sustainability and its commitment to monitor the EU’s carbon markets, it potentially opens the door to new forms of VCM oversight by the regulator. An Esma spokesperson did not respond to a request to comment.

A development of this kind would mirror steps being taken by the US’s Commodity Futures Trading Commission to beef up its oversight of the voluntary carbon market. Notably, enhanced regulation of the voluntary market could deliver significant benefits.

“A well regulated voluntary carbon market would help accelerate the achievement of net zero by better enabling companies to put carbon on their balance sheet as an asset, and to realise the economic value of the carbon that they have avoided, reduced or removed,” says Simon Puleston Jones, chief executive officer of non-profit organisation Climate Solutions.

Use of data

Meanwhile, Esma’s second thematic driver – technological innovation and the use of data – includes the strategic objective of “extending the effective use of data in financial market supervision”. This could play an important role in crafting new capabilities to support and monitor the growth of the EU’s wider sustainable finance ambitions.

According to Shanky Singh, a technology manager with Tech Mahindra, a multinational information technology service provider, integrating high-quality environmental, social and governance data into regulators’ toolkits is essential for stimulating the growth of sustainable finance while fighting greenwashing.

“Regulators globally have increased scrutiny and are incorporating sustainability into their financial supervision rules to safeguard investors from assets which are being marketed as sustainable to make it look attractive,” says Singh. “Europe’s markets overseer has placed improving the quality of and access to ESG data and financial markets among its priorities for the next five years.”

Even though the EU is well ahead of most other jurisdictions globally, in terms of the breadth and scope of its sustainability-linked regulation, Esma’s latest strategy affirms the bloc’s ambitions in the financial services domain.

That the regulator plans to marry its traditional strengths with the effective use of both technological innovation and data underscores the potential for the swift development of its supervisory and oversight powers in the years ahead.

A service from the Financial Times