EU progresses on its Sustainable Finance Action Plan

The March 2018 EU Sustainable Finance Action Plan (Action Plan) considers the financing of climate transition to be one of the key areas of action to reach the goals set in the 2015 Paris Climate Agreement. The Action Plan lists a large number of measures to be taken, a number of which have been translated into legal proposals or amendments to current EU financial services legislation.

At the time of writing, three main legislative initiatives stemming from the Action Plan are close to being concluded: the Commission proposal for a Regulation on the establishment of a framework to facilitate sustainable finance (sustainable finance taxonomy proposal), the Commission proposal for a Regulation on disclosures relating to sustainable investments and sustainability risks (sustainable finance disclosures proposal) and the Commission proposal for a Regulation on low carbon benchmarks and positive carbon impact benchmarks (low carbon benchmarks proposal). This article provides an update on the state of play of these three proposals and discusses new initiatives that are expected to come in 2020.

The sustainable finance disclosures proposal was officially adopted by the Council on November 8, 2019 and is due to be published in the Official Journal of the EU (OJ) by the end of the year. The Regulation will introduce a disclosure framework on the integration of environmental, social and governance (ESG) risks which is to be used by financial intermediaries both in investment decision-making or advisory processes. From January 1, 2022, financial market participants and financial advisors are obliged to disclose information on their policies on the integration of sustainability risks in their investment decision-making process or investment advice. This information should also be contained in their precontractual disclosures. In addition, financial market participants must disclose the possible principal adverse impacts on sustainability factors of a given financial product.

The low carbon benchmarks proposal was officially adopted by the Council on November 8, 2019 as well and is due to be published in the OJ around the same time as the sustainable finance disclosure proposal. The Regulation will amend the Benchmarks Regulation ((EU) 2016/1011) and puts new requirements in place for benchmark administrators (except for interest and currency rate benchmarks). Under the new rules, these benchmark administrators need to disclose in their benchmark statements whether their administrated benchmarks pursue ESG objectives. In addition, the Regulation establishes minimum standards and a common methodology for benchmarks that are labelled as “EU Climate Transition Benchmark” or “EU Paris aligned Benchmark.”

Of the three proposals discussed in this article, the sustainable finance taxonomy proposal is the only piece of legislation that remains to be debated upon. The proposed Regulation will establish the conditions and the framework to create a unified classification system on what economic activities can be considered as environmentally sustainable. The European Parliament adopted its draft report on the proposal on March 28, 2019 and the Council reached its general approach on September 25, 2019. The two legislators and the European Commission are currently engaged in so-called trilogue negotiations in order to reach a compromise. Trilogues started on October 23 and a last negotiation round is planned on December 3, 2019. Finland, who currently holds the rotating presidency of the Council and is the lead negotiator on behalf of the EU Member States, is aiming at reaching a compromise with the European Parliament before the end of 2019. This target date seems to be ambitious, as the positions taken by the Council and the European Parliament lie far apart. Differing views exist on the scope of the taxonomy, which the European Parliament wishes to expand beyond financial products that are marketed as environmentally sustainable. Additionally, the Council and European Parliament are split on the governance of the adoption of implementing measures to the taxonomy regulation, for which the Council would like to see the involvement of a Member State Expert Group.

The European Parliament and Commission are hesitant about this as it might not be in line with the EU founding treaties. A last point of contention is the application date of the sustainable finance taxonomy: while the European Parliament wishes to stick to the July 1, 2020 application date of the taxonomy for the first two environmental objectives, climate change adaptation and climate change mitigation, the Council wants a full application of the taxonomy by the end of 2022.

For the purposes of developing the implementing measures of the sustainable finance taxonomy, the Commission has tasked a Technical Expert Group (TEG) to publish reports developing the first taxonomies for the climate change mitigation and adaptation activities. The TEG has consulted upon its draft report over the course of 2019 and is due to publish its final report by the end of this year.

The three pieces of legislation discussed above only mark the start of the EU’s new regulatory framework on sustainable finance. Within the sustainable finance framework, the Commission has also considered the revision of a number of level 2 acts in order to increase the ESG considerations taken into account by investors. At the same time, it is the Commission’s intention to propose, legislation introducing an Ecolabel for retail investment products and standards for green bonds in 2020. These would be based on the sustainable finance taxonomy proposal. A new sustainable finance strategy, based on the proposed EU Green Deal, is expected to be published in mid-2020.