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.