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19 November 2021

ESMA's Ross: ESG – Next Level Reporting, Risk Management, Strategy and Responsibility

We are incorporating ESG factors across the full range of our activities. ESMA, in particular, has a key role in helping investors better understand the impact of environmental, social and governance (ESG) factors on their investments

This happens to be my first public speaking engagement after taking office as Chair of ESMA, and I think it is very fitting that I do this in front of an investor audience. ESMA has the important mandate to promote investor protection, also vis-à-vis the challenges posed by the current transition towards a more sustainable financial system.
In line with the mandate set out in our founding regulation and with our Strategy on Sustainable Finance1 which we published now almost two years ago; we are incorporating ESG factors across the full range of our activities. ESMA, in particular, has a key role in helping investors better understand the impact of environmental, social and governance (ESG) factors on their investments and how an investment contributes to a sustainable future.
In my remarks today, I would like to address three aspects that, on the one hand, are needed to support effective capital allocation decisions targeted at sustainable investments and, on the other, are needed to counter the risk of greenwashing: firstly, transparent and reliable disclosures; secondly, a good understanding of the underlying sustainability profile of target investments; and thirdly, sound board accountability and stakeholder involvement on sustainability commitments.
The growing importance of ESG in finance and the risk of greenwashing
As the title of today’s event indicates, ESG factors have been growing in importance in financial markets for some time. ESMA’s latest market monitoring indicators show that the growth of the sustainable bond market accelerated by 95% between summer 2020 and summer 2021, leading it to a total market value of €888 billion.2 At the end of June this year, green corporate bonds as such accounted for 3.5% of total EU corporate bonds outstanding. Turning to funds, the size of the ESG fund market reached €1.5 trillion in June 2021. This was an increase of 46% over the previous 12 months. This brought ESG funds to constitute 18% of the assets under management of EU equity, bond, mixed and money market funds publicly marketed in the EU.
The UN COP26 has just closed and governments around the world have committed significant resources to foster the channelling of private finance towards sustainable investing - which is set to become even more mainstream.
While, especially in the EU, the push for building a more sustainable economy has also relied on public sector initiatives, I think it is safe to say that ultimately much of this change is investor driven. In response to increasing demand for financial instruments and products that incorporate ESG factors, the supply of such instruments and products has also increased.
This is a dynamic that can play an important role in Europe’s green transition, but it also raises some key questions. For example: how do we know that each Euro invested in products that claim to be sustainable really translates into a positive impact on the environment or the society at large? Are investors always fully aware of what type of products they are buying when ESG-labelled investments are offered to them? These simple questions show the close link between the credibility of the whole sustainable finance initiative and the need to ensure investor protection in this area.
As ESMA, we observe that the rapidly growing demand for ESG products coupled with a regulatory regime that is still in the making creates a clear risk of distortions and even manipulation in the marketplace. The most common type of distortion is generally referred to

as "greenwashing” or “ESG-washing”. These terms refer to situations in which the disclosed sustainability profile of a company, a financial instrument or a financial product does not properly reflect the underlying sustainability risks and impacts. As such, greenwashing can lead to misrepresentation, misselling and mispricing. It therefore has potentially detrimental effects on investor protection and for the correct functioning of financial markets at large.
ESMA is currently planning its activities for the coming years in relation to ESG and sustainable finance in general. We will have an ambitious and comprehensive programme and the topic of greenwashing will play an important role in these activities. We intend to work closely with national securities regulators to promote a coordinated approach across the EU to tackling this issue.

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