European Regulators Prioritize Climate-Related Transparency in Financial Products

The European Central Bank and the European Supervisory Authorities (ESAs) have unveiled plans to introduce new climate change-related disclosure requirements for structured finance products, according to ESG Today’s news. The move is aimed at enabling investors to better identify climate-related risks in investments. Structured finance products typically include investment products whose returns are linked to underlying assets, created through a securitization process. Assets involved in securitization transactions often include real estate mortgages or auto loans, which the ECB and ESAs say could be directly exposed to physical or transition-related climate risks.

The new disclosure standards will enhance transparency and disclosure more broadly for financial institutions and financial products. The ESAs, which include The European Banking Authority (EBA), The European Insurance and Occupational Pensions Authority (EIOPA), and The European Securities and Markets Authority (ESMA), have been developing advice and standards under the EU Taxonomy and SFDR regulations. The ECB has been incorporating climate change considerations into its monetary policy framework and recently published a series of new statistical indicators aimed at helping to analyze climate-related risks in the financial sector.

In a joint statement announcing the development of the enhanced disclosure standards, the organizations said, “The European Supervisory Authorities (ESAs) and the ECB are committed to contributing to the transition towards a more sustainable economy within their respective mandates. As investment in financial products meeting high environmental, social, and governance (ESG) standards is increasingly important in the European Union (EU), it has also become a priority for structured finance products to disclose climate-related information on the underlying assets.”

The lack of climate-related data on the assets underlying structured finance products impedes the classification of the products under the EU Taxonomy and SFDR Regulation. Therefore, ESMA, with contributions from the other ESAs and the ECB, is working on enhancing the disclosure standards for securitized assets with climate change-related information. The ECB and ESAs also called on originators to collect data needed by investors to assess the climate-related risks of the products’ underlying assets, even in the current absence of mandatory disclosure requirements.

The organizations stated that consistent and harmonized requirements for these instruments are necessary for properly assessing and addressing climate-related risks. They would also ensure a level playing field across similar asset classes, foster comparability for investors, and facilitate equal treatment by EU supervisors. The ESAs and the ECB are committed to supporting the comparability of future disclosure requirements within their respective mandates.