ESMA publishes explanatory notes on concepts under the ESG framework

On 22 November 2023, ESMA published three explanatory notes relating to the EU Sustainable Finance framework.

These are:

• Concepts of sustainable investments and environmentally sustainable activities (the Sustainable Investments note);

• 'Do No Significant Harm' definitions and criteria; and

• Concept of estimates.

Overall, the notes summarise guidance already provided on three defined terms or concepts under EU sustainable finance law and do not seek to set out any new interpretations.

Market participants may well find it helpful to have the relevant guidance collated in one place.  

The Sustainable Investments note, though, contains a few points of particular interest:

• It's interesting to see the emphasis that ESMA puts, fully endorsing fully endorsed the Commission's previous view that the concept of "sustainable investments" is a purely subjective one, to be defined by the Financial Market Participant, with no mandatory minimum thresholds imposed. This, though, is more a point on tone and emphasis on the part of ESMA, rather than new guidance.

• Paragraph 22 is also interesting. In it, ESMA describes two "safe harbours" under SFDR outlined by the Commission (passive funds tracking Climate Transition Benchmarks and Paris-aligned Benchmarks and Taxonomy-aligned use of proceeds investments) as being automatically SFDR sustainable investments.  This seems to be a somewhat firmer view than has previously been expressed before in this context.

• On the face of it, paragraph 17 appears to be taking a very narrow interpretation of the Commission response on the requirement to apply good governance, limiting the "exception" it to government bonds. This may, though, only be because the Commission was only asked specifically in relation to government bonds and so only responded in relation to these and ESMA is then sticking to the Commission line. Either way, it does seem to be the case that ESMA's note does not endorse the wider view being taken by many in the industry. However, we do not see anything in the paper which requires firms to reassess an approach which limits good governance to corporates only.

We will be considering the notes in greater detail over the next few days and will report further on any additional points worth raising.