Sustainable Finance: an update

The European Commission wants to bring its Action Plan on Sustainable Finance to a successful conclusion in the near future. It is thereby continuing to adopt a complex set of directives and regulations that should profoundly change the approach of players and investors in financial markets. These actors will have to take into consideration the environmental and social impact of the financed activity on the sustainable development of humanity. Here we provide you with an update on the progress of the key initiatives addressed in Eubelius Spotlights June 2018.

Taxonomy of sustainable activities

The legislative procedure for the draft European regulation is still ongoing. The first reading has been completed by the European Parliament and the Council. The Parliament adopted its position in March 2019. The Council is still deliberating on the subject.

In June 2019 the TEG (Technical expert group on sustainable finance) published a report on the use of the taxonomy, as well as a technical report detailing the methodology that it is developing to determine, per economic activity, how the activity, as conducted by a company in the sector, substantially contributes to mitigating or adapting to climate change (technical screening criteria). Six sectors are covered at this stage, but not exhaustively: agriculture, manufacturing, energy, water, transportation, ICT and, finally, buildings.

In addition to the positive evaluation criteria, attention should also be paid to the DNSH criteria ("do no significant harm").

Three principles help to identify whether an activity substantially contributes to climate change adaptation:

  • the economic activity reduces all material physical climate risks to the extent possible and on a best effort basis;
  • the economic activity does not adversely affect adaptation efforts by others; and
  • the economic activity has adaptation-related outcomes that can be defined and measured using adequate indicators.

The Commission has decided to extend the mandate of the TEG with regard to the development of the taxonomy. This mandate runs until the end of 2019. The TEG will use this time to:

  • refine the technical screening criteria;
  • call for additional feedback; and
  • provide further guidance on the usability and implementation of the taxonomy.

The recommendations of the TEG will provide guidance to the Commission in the development of the delegated acts provided for in the regulation.

Integration of ESG factors by financial market participants

The legislative procedure is still ongoing. The first reading has been completed by the European Parliament and the Council. The Parliament adopted a resolution on 18 April 2019 setting out its position on this proposal.

New guidelines on disclosure of non-financial information by public interest entities

The TEG published a final report in January 2019 for the purpose of bringing the European guidelines in line with the TCFD (Task Force on Climate-related Financial Disclosures) proposals.

Based on this report, the Commission modified its guidelines on non-financial reporting and more precisely supplemented them regarding the reporting of climate-related information (2019/C 209/01). The new guidelines highlight a double materiality perspective of the information: on the one hand vis-à-vis shareholders (the impact of climate change on the company) and on the other hand vis-à-vis other stakeholders (the impact of the company's activity on the climate). Both perspectives present risks and opportunities for the company.

Low carbon footprint benchmarks

In February 2019, the three institutions engaged in the European legislative procedure reached a political agreement on a new generation of low carbon benchmarks. These agreed rules still have to be formally approved by the Council and the European Parliament before they can enter into force.

An interim report has been published by the TEG. The final report is expected by the end of September. The Commission will adopt delegated acts on the basis of this report, and these delegated acts are expected to be adopted at the beginning of 2020.

Different requirements have to be met in order to qualify as an EU Climate Transition Benchmark or an EU Paris-Aligned Benchmark.

The TEG proposes new disclosure requirements based on how the market currently understands that ESG and climate-related considerations can be integrated into the valuation of assets as part of a particular asset class, or across similar asset classes.

Finally, the question rises of alignment of each benchmark with the Paris Climate Agreement. The interim report aims at identifying market practices that appear to measure the alignment with Paris of investment portfolios. The focus is on the transparency of the scenario selection, the source of the data used and the methodology for measuring the alignment of a benchmark with a scenario.

Integration of ESG factors into advisory services

The Commission has sought feedback on amendments to MiFID II and IDD or their delegated acts in order to include ESG considerations in the advice provided by investment firms and insurers to individual clients. The Directorate-General for Financial Stability, Financial Services and Capital Markets Union has sent a formal request to EIOPA and ESMA for technical advice in this respect.