ESMA sees high risks amid fragile markets

The European Securities and Markets Authority (ESMA), has published its first 2023 Report on Trends, Risks and Vulnerabilities (TRV).
In its report, ESMA highlights the continuous high level of risk, and investors should be ready for additional market corrections. ESMA defines the drivers of risk in EU financial markets: The geopolitical environment, the slowdown in economic activity, high inflation, global financial tightening, and the materialization of periphery risks related to leverage and liquidity, along with growing concerns over business practices in the cryptocurrency space, dominated the second half of 2022.
Almost all of the risk factors are at least given a “high“ rating in the overall risk assessment. Despite an overall drop in prices, energy market volatility remained high. In 2H22, the EU fund industry witnessed outflows and poor performance across the majority of fund types, as assets under management fell precipitously for the first time since the Global Financial Crisis. Existing worries about fund liquidity risk management, excessive leverage, and contagion risks due to strong systemic interconnections were confirmed by the impact of the UK Gilt market turmoil on leveraged Liability-Driven Investment Funds in 2H22. Maturity mismatches in Commercial Real Estate Funds still exist.
Because of how the energy crisis is putting the goals of decarbonization in jeopardy, net-zero pledges are coming under increasing examination. In general, investors seem to be differentiating between products based on their sustainability credentials, as evidenced by the steady net inflows into SFDR Article 9 funds, while the emphasis on “greenwashing“ has grown. Despite this, ESG markets kept expanding, demonstrating their resistance to wider market changes.
For more detailed informations, please consult the attached report.