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European Securities and Markets Authority Increases Its Attention to Climate Risks

European Securities and Markets Authority (ESMA) announced that it has established climate risk as a new, separate category in its risk assessment and monitoring framework, alongside existing categories which include liquidity, market, credit, contagion and operational risk.

In its semi-annual Trends, Risks and Vulnerabilities report, released recently, the regulator added the new category «Environmental Risks» to its remit, and the regulator said that it will initially focus on climate as the most prominent risk under this category.

The new climate risk category is intended to capture physical and transition risks, as well as the potential risks associated with green finance.

Several days ago, European Securities and Markets Authority (ESMA) also announced the release of its new Sustainable Finance Roadmap, setting out its priority areas for action and implementation deliverables to address the rapidly emerging and evolving sustainable finance market over the next three years.

One of the key challenges for regulators, and a top priority area for ESMA’s new roadmap, is addressing the risk of greenwashing, referring to situations in which the claims made regarding the sustainability profile of an issuer or a financial instrument are misleading or misrepresented. ESMA notes that greenwashing can either be intentional or unintentional as a result of regulatory differences or poor data quality. The new roadmap outlines ESMA’s strategy to better define, address and help find common EU-wide solutions for greenwashing.

ESMA was founded in 2011 with the primary objectives to enhance investor protection and promote stable and orderly financial markets, with assessing risks to investors, markets and financial stability set as one of its key activities.