Sustainable Finance: Measures taken by EU Financial Institutions

Background

Following the political commitments set out in the United Nation’s 2030 Agenda for Sustainable Development[1] and Paris Climate Agreement from 2015, the European Union (EU) has set its own ambitious climate goals to cut the greenhouse emissions by at least 40%[2] by 2030 compared to 1990 levels with the view of becoming the world’s first climate-neutral continent by 2050.

Reaching the 2030 climate targets will require the EU to ensure additional investments of approximately EUR 260 billion[3] per year in this green transition process and this scale of investments goes far beyond the capacities of the public sector alone. Against this background, EU Commission has recognized the potential of the financial sector which will be expected to get more involved in the future in this green transition process.

Our table sets out in more detail the measures taken by financial supervisory authorities in Europe covering:

• Sustainable Finance Policy
• Disclosure
• Taxonomy
• EU Green Bond Standard and EU Ecolabel For Retail Financial Products
• MiFID II
• UCITS and AIFMD
• IFR and IFD
• Benchmarks
• Credit Ratings
• Insurance Distribution Directive
• Solvency II

EU Action Plan

On 8 March 2018, the EU Commission came up with its Action Plan on Sustainable Finance which aims to ensure that financial institutions start to play a key role in the process of reaching the aforementioned climate goals by reorienting capital flows towards more sustainable investments, financing the sustainable and long-term growth and by contributing to the creation of a low-carbon, climate-resilient and circular economy.

Under the EU Action Plan, the EU Commission has proposed several legislative measures, the most important of which include:

Taxonomy Regulation

Having entered into force on 18 June 2020, the Taxonomy Regulation (Regulation (EU) 2020/852) establishes a uniform framework for the classification of environmentally sustainable economic activities which aims to prevent the so-called “greenwashing” in the EU. Further, the Taxonomy Regulation stipulates additional disclosure obligations to those applicable to financial institutions under the Disclosure Regulation as well as disclosure obligations for certain corporates by a way of supplementing the disclosure obligations under the Non-Financial Reporting Directive. Regulatory requirements under other legislative proposals that are part of the EU Action Plan will largely be dependent on the classification system stipulated under Taxonomy Regulation.

Disclosure Regulation

The Disclosure Regulation (Regulation (EU) 2019/2088), also known as Sustainable Finance Disclosure Regulation (SFDR), introduces new disclosure obligations for financial market participants and financial advisors as regards the disclosure of sustainability-related information with respect to investment services provided and financial products offered to clients. The SFDR entered into force on 27 November 2019 and the majority of its provisions will start to apply from 10 March 2021.

Low Carbon Benchmark Regulation

Regulation 2019/2089/EU amends the EU Benchmark Regulation (Regulation (EU) 2016/1011) by introducing two new types of environmentally oriented benchmarks, the EU Climate Transition Benchmark and the EU Paris Aligned Benchmark, and by imposing obligations on benchmark administrators to make significant disclosures regarding the methodology used to measure and reconcile environmental, social and governance (ESG) factors and low-carbon factors in the composition of the aforementioned low-carbon benchmarks. The Regulation entered into force on 10 December 2019 and has started to apply from 30 April 2020.

Amendments to Level 2 acts under MiFID II, UCITS, AIFMD, IDD and Solvency II

Targeted legislative amendments to sector-specific pieces of EU legislation which implement new requirements on disclosure of sustainability-related information and consideration of relevant sustainability factors and risks into several Level 2 acts under MiFID II[4], UCITS[5], AIFMD[6], IDD[7] and Solvency II[8] framework have also been proposed as part of the EU Action Plan on Sustainable Finance. Draft legislative proposals have been published by the EU Commission on 8 June 2020 and they are now still to be finalized and officially adopted.

EU Green Deal

Building on the EU Action Plan on Sustainable Finance, on 11 December 2019 the EU Commission presented the new European Green Deal, a set of ambitious and wide-ranging measures which are aimed at increasing the original carbon reduction targets to 50-55% by 2030 and which will be backed by the new legislative force, the EU Climate Law. With this legislative initiative, the EU Commission intends to stipulate for the first time a legally binding commitment to net-zero carbon emissions in the EU by 2050. As part of the European Green Deal, a public consultation on the renewed Sustainable Finance Strategy was also launched in April 2020 and is intended to define new measures for the finalization of the main pillars of the EU Action Plan on Sustainable Finance from 2018.

Click here to view the measures taken by EU Financial Institutions.