ESG Matters: Sustainability supervision in the financial sector

2024 outlook for supervision on sustainability in the financial sector
EBA 2024 work programme – Focus on financial stability
The European Banking Authority (EBA) will continue to build its ESG risk monitoring framework, aiming to efficiently oversee ESG risks in the banking sector and further develop the green financial market. This will include a gradual increase in the use of external data relevant to ESG risks.

The EBA specifies some milestones:

• Q1: approval of the revised EU-wide ESG stress test framework.
• Q2: call for evidence on greenwashing - final report.
• Q3: annual report on the SFDR’s Principal Adverse Impact (PAI) disclosures and due diligence practices.
• Q4: Pillar 1 follow-up report on capital requirements directly linked to ESG risks (see also the recent EBA report in the spotlight section).

EIOPA 2024 work programme – Focus on models and data to identify and monitor sustainable activities
The European Insurance and Occupational Pensions Authority (EIOPA) aims to make progress in analysing biodiversity-related and social risks and impacts. EIOPA will implement activities to establish itself as a Centre of Excellence in catastrophe models and data.

Some highlighted topics:

• Prudential framework: integration of ESG risks and consolidation of the macro/micro-prudential ESG risk assessment.
• Greenwashing: monitoring and supervision of insurance products marketed as sustainable.
• Protection gaps: contributing to increased risk awareness of risk-based prevention measures with the aim to reduce insured losses.
• Data and source modelling: positioning itself as a relevant open-source data hub, providing climate-related data and models.

ESMA 2024 work programme – Focus on greenwashing and green bonds
The European Securities and Market Authority (ESMA) will continue to provide guidance to promote the convergence of ESG-related supervision on the key Directives and Regulations that fall within its remit. These include MiFID II, the Taxonomy Regulation, the CSRD and the Benchmark Regulation. 

Specific output of the ESMA in 2024:

• Greenwashing: final report proposing actions to combat greenwashing.
• Green Bonds: publication of technical standards (see also the spotlight below).
• Credit Rating Agencies: technical advice on CRA’s review of ESG-related data and reports.
• IT and data: feasibility assessment of new data and IT-projects relating to ESG disclosures.

ESAs 2024 work programme – Focus on SFDR implementation
The European Supervisory Authorities (EBA, EIOPA and ESMA, jointly: ESAs) outline their intention to publish their third annual report under Article 18 of the SFDR, on Principal Adverse Impact (PAI) statements and due diligence practices. In particular, the ESAs will monitor the practical application of the SFDR Delegated Regulation to determine whether Q&As or other Level 3 supervisory convergence tools should provide specific guidance to national competent authorities and market participants.

2024 and beyond: consultation for a revised SFDR
While the SFDR has only been in force since March 2021, the European Commission (EC) has recently launched a targeted and public consultation on the SFDR. This may lead to significant adjustments to the SFDR, particularly regarding the Level 1 Regulation on sustainability transparency by financial market participants.

The EC is consulting on the following topics:

• Should the SFDR become a true labelling system? The SFDR is designed as a transparency regulation, requiring financial market participants to report on how they handle sustainability following a prescribed format at the entity and product levels. In practice, however, the SFDR is primarily perceived as a labelling regulation, indicating whether a product is dark green, light green, or grey. Several questions in the consultation suggest that the EC is considering to align the SFDR with market perceptions (e.g.: ‘what would be the benefits of a labelling system and how could it be structured?’).
• Should product information be (more) standardised? In the discussion on standardised product disclosures, the EC is exploring the introduction of product disclosure requirements that would apply to all financial products offered in the EU, regardless of the underlying sustainability-related claims or other considerations. Which disclosure requirements are considered useful, and which are not?
• Marketing of sustainable products – use of the word ‘green’. The EC is consulting on whether the current SFDR requirements are sufficient to combat greenwashing. Are additional rules needed, such as a ban on words as 'ESG', 'green' and 'sustainable'? Should there be a mandatory link between certain product characteristics and words?

What this means for you:

• ESG remains high on the agenda of all regulators. It is important to keep track of what lies ahead.
• The potential SFDR revision will have a significant impact. Although any revisions will not be implemented in 2024, the outcome of the consultation may shed light on what is expected of financial market participants.
• It is clear that regulators are moving towards the implementation of firm capital requirements related to ESG risks. This is an important development to watch.

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