The European Securities and Markets Authority said Thursday that implementing Europe's new regulation governing financial firms' adoption of environmental, social, and governance factors will be at the core of its supervisory activities for a sustainable finance strategy.
Europe's super regulator plans to complete its work on the rules by July.
By helping to further develop the European Union's taxonomy on sustainable investing, which was adopted in December, ESMA seeks to further clarify financial firms' disclosure obligations. The taxonomy is a key piece in the disclosures regulation as it aims to classify companies according to their level of carbon emissions. Under the disclosures regulation, investors and managers will be expected to show to what degree their portfolio companies emit carbon dioxide and to what extent they pollute the environment or affect biodiversity.
To ensure that ESG guidelines are followed by firms that operate under ESMA's jurisdiction, the regulator will analyze financial risks stemming from climate change, including potentially stress testing different market segments.
By inspecting issuers, investment funds, money management firms and retail investors, ESMA seeks to mitigate risks stemming from greenwashing and the misrepresentation of strategies as sustainable investments, and to foster reliable reporting of non-financial information from issuers.
"The financial markets are at a point of change with investor preferences shifting towards green and socially responsible products, and with sustainability factors increasingly affecting the risks, returns and value of investments," Steven Maijoor, chairman of ESMA, said in a news release Thursday. "ESMA, with its overview of the entire investment chain, is in a unique position to support the growth of sustainable finance while contributing to investor protection, orderly and stable financial markets."