“I would like to stress it once again that the asset management industry has a very important role to play in contributing to the climate transition, and ensuring financial stability at the same time,” said Evert Van Walsum, head of the investor protection and sustainable finance department at European Securities and Markets Authority (Esma) during an Association of the Luxembourg Fund Industry conference on 19 March 2024.
In his speech, Van Walsum suggested that it is important to review markets and regulatory developments impacting the investment management sector until the end of the current legislative cycle and “prepare for a new European Parliament, and a new commission.”
Esma strategic priorities for the coming years (2023-2028)
Referring to a recent report from the commission, Van Walsum noted specific vulnerabilities related to non-bank financial intermediation entities. These are liquidity mismatches, leverage and interconnectedness. Mindful of Esma’s experience, he warned that market events may “interfere with the execution of the plan.”
Addressing liquidity challenges
The main concern on liquidity relates to “mismatches for open ended funds, which may create financial stability issues, but also retail investor protection concerns,” stated Van Walsum. He reminded the audience about the recommendations from to address these structural vulnerabilities.
He remarked that the “new AIF and Ucits directives require managers to select at least two liquidity management tools for each fund”. Besides, Esma will be tasked to “develop regulatory technical standards and guidelines on the characteristics and the use of these liquidity management tools.”
In the meantime, Van Walsum reported that Esma continues to be active in monitoring open-ended funds and reflected some concerns about real estate funds offering daily redemptions. “The risk posed in these funds could be systemically important… in some jurisdictions where real estate funds are part of a larger share of the market.”
Leverage in funds
Van Walsum commented that Esma has published guidelines in 2021 on the implementation of , which empowers national competent authorities (NCAs) to introduce leverage limits to curtail the build-up of risks and leverage. He noted that these powers were recently used on Irish commercial real estate funds by the Central Bank of Ireland for the first time.
Sustainable finance roadmap: discoveries and remediation actions
Van Walsum explained that the sustainable finance roadmap for a period of 2022-2024 contains mainly three sections: 1) texting, greenwashing and promoting transparency 2) monitoring, assessing and analysing ESG risks and 3) building NCA and Esma’s capacities in sustainable finance.
Fund names to be more heavily regulated
Van Walsum thinks that fund names are a powerful marketing tool and are central to retail investors’ decision-making processes. “This is why the use of ESG, sustainability and transition-related terms and fund names should be reflected in the funds’ investments.”
Greenwashing risk is material across all key segments of the sustainable investment value chain
Esma aims to help investors choose sustainability-related investment funds with greater confidence about their real credentials given the widespread use of SFDR article eight and nine as proxy labels. Esma supports the implementation of a categorisation system as a means to facilitate investor choices and avoid greenwashing.
Van Walsum said that Esma considered feedback from a broad array of stakeholders and decided to “move away from determining a precise numerical threshold for sustainable investments.”
Greenwashing risk is more widespread than expected
According to reports from European supervisory authorities (ESAs) in June 2023, “greenwashing risk is material across all key segments of the sustainable investment value chain,” due to conduct issues and structural problems in the legislative framework.
The authorities may have identified several areas of weaknesses, yet Van Walsum stayed vague about the actions expected to be undertaken by the authorities apart from commenting on the “steep learning curve” experienced by the NCAs and Esma and the need for supervisory convergence.
Ongoing surveillance on ESG risks
Van Walsum reminded that SFDR article eight and nine products (€6trn and €300m of assets under management, respectively) accounted for 50% of all Ucits. Given the high and increased demand and supply of sustainability products, Esma launched in January 2023 the union strategic supervisor priorities (USSP) focused on ESG disclosures.
He thinks that by defining ESG disclosures as USSP for NCAs provides Esma “with a very strong framework to ensure that actions are taken and prioritised in a consistent manner across NCAs.”
In addition, he explained that Esma and NCAs agreed to undertake several common supervisory actions on sustainability risk integration and disclosures aiming to assess the markets’ compliance with the relevant provisions in the SFDR, the taxonomy regulation and relevant implementing measures.