Having been reappointed for a second term as a (financial market participant) member of the SMSG and at the first meeting been elected as one of two Vice Chairs, I look very much forward to working with the new Chair Giovanni Petrella, Professor of Banking and Finance at Università Cattolica in Milan, my colleague as Vice Chair Sari Lounasmeri, CEO of the Finnish Foundation for Share Promotion (as a representative of stakeholders other than financial market participants) and the other distinguished members of the SMSG.
The composition of the SMSG with members representing a variety of stakeholders and the obligation of ESMA to consult with the SMSG on certain actions distinguishes this group from other respondents to ESMA consultations. While ESMA is not legally obliged to follow the advice of the SMSG, it has an obligation under the ESMA Regulation to make consultations and advice from the SMSG public, with information on how such advice and consultations have been considered.
Based on the experiences from my first four-year period in the SMSG, the SMSG is at its best and makes its most valuable contributions when it provides advice and responses that go beyond the contribution each individual member (and his or her organisation) can make. As a result of its composition and the active and positive participation of its members, SMSG is in my opinion in a “pole position” to provide added value to ESMA and the European regulatory and supervisory system by making the whole greater than the sum of the parts.
Against that background, I look forward to working with my colleagues in the SMSG and in ESMA on several interesting topics in the coming months and years. While ESMA’s remit spans over a wide variety of topics, from post-trade to crypto-assets, I will below limit myself to some observation relating to Retail Investors in Capital Markets, Sustainable Finance, Greenwashing, and the Capital Markets Union (CMU) which may be renamed the Savings and Investment Union.
Retail Investors in Capital Markets
EU citizens are good at saving but most often “invest” their savings in bank accounts or real estate, rather than investing them in capital markets. In addition, many retail investors who are active in capital markets invest at least some of their capital in markets outside of the EU, most notably the United States. As a result, the EU is a net exporter of capital to markets outside of the EU, while at the same time we have been working hard (but only partially succeeding) in building the CMU.
Much thought has gone into understanding why EU citizens generally seem to avoid or at least do not actively consider investing in capital markets. The consequence is not only that European companies miss out on capital they need to grow their businesses, but also that retail investors miss a golden opportunity to see their savings grow at levels well above bank interest rates. Looking for an explanation, one common answer is that we as Europeans generally lack the “investment culture” of the United States, but references is also made to the lack of trust, the perceived (sometimes actual) complexity of financial markets, lack of incentives and financial advice, and low levels of financial education.
As so often, the truth probably lies somewhere in between, but in the EU the case of my native Sweden indicates that it is possible to grow an investment culture also in the EU. This may however take some time and we may want to take it step by step, as we did in Sweden, where we are (for those who do not know us) fond of thorough analysis, long discussions where everyone is heard, and high levels of consumer protection, but at the same time acknowledge that there are risks in capital markets, as in life.
In my view, having spent more than 30 years in financial markets in- and outside of Sweden and the EU, the Swedish Financial Supervisory Authority (SFSA) is doing a goodjob in “policing” our capital markets, thereby increasing trust in such markets. The SFSA is clear and “direct” when needed, but also work together with the industry in areas such as financial education and sustainable finance. Successive governments of different colours have provided tax incentives but have also, which is even more important, simplified or completely removed tax reporting requirements, as is the case with the Swedish Investment Savings Account, ISK. As a result, every second Swede is now to different degrees invested in capital markets, often from the day they were born, as it is not uncommon for grandparents to then make a first payment into a mutual fund in the baby’s name.
While much of the work to promote retail investments has to be done at Member State leve, ESMA has an important role to play by supervising and “policing” capital markets directly and indirectly through its support to NCAs, providing technical standards and guidelines, simplifying rules and sorting out complexities, making information readable (also digitally) and understandable, and looking at innovations and into the world of crypto assets.
In this work, the SMSG has an important role to play by providing advice and at times taking own initiatives to support the work of ESMA, in relation to existing as well as coming EU regulations.
Sustainable finance
ESMA’s work in the field of sustainable finance is presently based on its Sustainable Finance Strategy1 and the Sustainable Finance Roadmap for 2022 – 2024.2 Most of the actions and deliverables in the roadmap have been delivered and we look to see and discuss the new roadmap in the coming months. Before that, work remains to be done inter alia on technical standards for taxonomy and sustainability information for issuers, as well as on sustainability information reporting under the European Sustainability Reporting Standards.
ESMA has been given new mandates since the publication of the roadmap, such as in the European Green Bond Regulation and ESG Ratings Regulation. In the coming years, work will also be needed to facilitate the financing of the EU transition towards a more sustainable economy. We will also continue the work to integrate environmental and climate change risks in stress-testing and other regulatory frameworks. ESMA’s work to actively monitor developments in the ESG area, build capacity, and train experts will also be important.
With reference to the text about retail investors above, the important work of ESMA and the other ESAs is at full display in the Joint ESAs Opinion on the assessment of the Sustainable Finance Disclosure Regulation (SFDR).3 The ESAs state that while the SFDR has played a role by increasing transparency on sustainability features and channel more capital to sustainable investments, improvements could be made to the framework. Consumer testing has shown that SFDR is complex in nature and may be difficult to understand, a finding that does not come as a surprise to those who have followed this topic.
It is also well known that the SFDR disclosure system is used in ways that go beyond what was intended, with references to “Article 8” and “Article 9” being a sort of sustainability quality label, leading to mis-selling and greenwashing risks, as was also highlighted by SMSG in a previous advice to ESMA, as further discussed below.
Greenwashing
As the interest of investors in sustainability and ESG has increased, so has the risk of practices where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of a financial product, a service, or an entity. SMSG in its previous iteration provided advice to ESMA in January 2023,4 with the undersigned as one of two Rapporteurs, in response to an ESA call for evidence, followed by additional advice in March 2023.5 In a Progress Report published in June 2023,6 ESMA presented its and the other ESAs high-level understanding of greenwashing, highlighting areas considered to be more exposed to greenwashing risks. Final reports were thereafter published by ESMA, EBA and EIOPA, in June 2024.7
In its Final Report, ESMA looks at the role of supervisors in mitigating greenwashing risks, takes stock of what has been done so far, and provides a vision of how supervision can be gradually enhanced in the coming years. As ESMA continues its work in this field, working together with NCAs to develop indicators to monitor greenwashing risks, build capacity in ESMA and in NCAs, follow-up on the recently published guidelines on funds’ names,8 and much more, I trust that greenwashing will again appear on the agenda of the SMSG.
A Savings and Investments Union
Work with building the CMU has covered a lot of ground since the launch of the project in 2015. Numerous actions have been taken and some progress has been made, but more remains (and must) be done to increase the competitiveness of EU capital markets. While this was always an important task, it has become even more important in these times of serious challenges, with low growth, high inflation, and war in our neighbourhood. It is thus with interest that I have followed the initiatives to bring new ideas to the table, such as the report “Much more than a market” by former Italian Prime Minister Enrico Letta which was published in April 2024.9 One proposal in the report which is of interest here is thereby to retire the incomplete CMU project and instead start working on a Savings and Investments Union.
Another good and valuable initiative to bring fresh perspectives to the table is the position paper “Building more effective and attractive capital markets in the EU” published by ESMA in May 2024.10 As the Chair of ESMA, Verena Ross, put it in a speech shortly after the publication of the paper, in June 2024:11 “The truth is, that the challenges faced by Europe need, as part of the solution, stronger capital markets. Yet, the fact is that Europe’s capital markets remain somewhat underdeveloped and fragmented. So fresh perspectives are needed.”
The position paper was drafted by a small group of ESMA Board Members but was endorsed by the full ESMA Board. It presents 20 recommendations, taking three perspectives – of investors, needs of businesses, and the regulatory and supervisory framework. While some of the proposals are admittedly familiar (but still very important) other provide new perspectives. In fact, all proposals are of value and bring new perspectives, as they are presented from the important viewpoint of financial supervisors with vast experience from the world of capital markets.
Many of the proposals set out in the ESMA-paper require actions at Level 1, by the European Institutions. Some relate to products and services, such as the creation of an EU-label for basic and simple investment products and a simple advice category for such products. Other aim to promote greater inclusivity and accessibility, where digital solutions may be of help, and improve financial education. Other proposals still aim at boosting the financing of European companies, stimulating equity funding, and ensuring a good ecosystem for listed companies, and promoting EU capital markets as a hub for green finance.
As said many proposals require action by Member States in the Council, but some proposals also bring the case closer to the homes of Member States. In this category we find proposals to find common approaches when it comes to taxation and insolvency, the re-evaluation of tax incentives for retail investors to invest in capital markets, and the reform of national pension systems to make them more capital markets oriented.
It is also interesting to read ESMA’s proposals relating to the rulemaking and supervisory processes in the EU. All of us who have worked or work directly or indirectly with Level 1, in my case as the Swedish representative for close to five years in the Council Working Group on Financial Services in the wake of the financial crisis, rulemaking in Brussels is often quite time consuming and compromises often result in more details. Against that background it is easy to agree in principle with ESMA, that there is a need to modernise the EU’s regulatory framework for financial services, implement more forbearance powers for ESMA, and above all take the opportunity in the next legislative cycle to streamline and tidy up the single rulebook.
Most proposals in the position paper are thus interesting and deserve a good discussion, as well as further analysis. It can also be assumed that ESMA’s proposals will be presented and discussed in the corridors of the new European Commission as well as with members of the European Parliament. On my side, I look forward to interesting discussions in the SMSG, when ESMA gets formal mandates to develop its thoughts and ideas, but hopefully also well before that.
In the meantime, before the CMU turns into the Savings and Investments Union, we have a few things remaining on the CMU to-do-list. Under “the Listing Act” heading we do for example find technical standards, guidelines, and advice, on important matters such as research and prospectus liability, as mandated in the revised versions of MiFID, the Prospectus Regulation, and the Market Abuse Regulation. Work will also be put into draft technical standards for the European Single Access Point, where a new IT infrastructure will have to be put in place. Work will also have to go into the selection, authorisation, and supervision of forthcoming Consolidated Tape Providers.
Looking forward to interesting discussions
The text above refers to some of the important work that lies ahead of us. It does not mention or only briefly refers to important areas such as digital finance and technological innovation, post-trade, and the international work of ESMA. Those topics and many more will have to be left for another day, or another article.
The areas and topics covered, how to bring retail investors to capital markets and promote sustainable finance while at the same time fight greenwashing, will however all be important if we are serious (as we should be) in our ambition to build a Savings and Investments Union.
We have before us an opportunity that must not be missed, to make our EU capital markets into something that is much greater than the sum of its parts, and I personally look very much forward to interesting and important discussions on this and many other topics in the SMSG, with ESMA and other relevant parties, in the coming months and years.
