Sustainable Finance is coming – what does it mean?
What has been planned?
The European Commission has published a Sustainable Finance Action Plan in order to channel more financing into sustainable investments that support the transition to a low-carbon, resource-efficient economy. The aim is to fill the investment gap that is needed for the EU to achieve its 2030 emission reduction targets set out in the Paris agreement.
The Action Plan consists of three regulation packages:
- Regulation on the adoption of a framework for sustainable investments (“taxonomy”)
- Regulation on disclosures relating to sustainable investments and sustainability risks
- Regulation on introducing two new sustainable benchmarks
What has been done?
All of the regulation packages have been drafted and the disclosure regulation and the benchmark regulation have been approved in the trilogue negotiations as well. They will be published as soon as the final legal checks have been completed. The taxonomy regulation regarding the adoption of framework for sustainable investments has just been discussed in the European Council by the member states and they have reached agreement on the 25th of September. The trilogue negotiations led by Finland will be started soon. Once that is finished the regulation will be published after legal checks.
Level 2 & Level 2.5
As the Level 1 regulation packages determine what financial market participants and insurance intermediaries need to do, the level 2 and 2.5 additions specify the technical details of how they need to do it. A technical expert group (TEG) has been set up by the Commission to prepare the taxonomy for sustainable investments that is referred to in regulation 1 and the two new low-carbon and positive carbon impact benchmarks that are referred to in regulation 3. The TEG is currently finalizing the first part of the taxonomy and the new benchmarks, which will then be published by the Commission and approved by the Parliament and the Council as delegated acts. It is good to note that the taxonomy that is now being processed is just the first part. It consists of 67 activities that contribute substantially to mitigating climate change. The TEG has already started preparing the second part of the taxonomy that includes even more activities across different sectors that contribute to some of the other six environmental objectives set out in the regulation.
The European Supervisory Authorities (ESA) has started preparing regulatory technical standards (RTS) for the regulation 2 on disclosure requirements. The RTS are more detailed guidance on how the requirements set out in the regulation should been fulfilled. The final version of the RTS will be published by the ESA in 2020 after which they will be approved by the Commission, Parliament and Council.
What happens next?
The level 1 disclosure and benchmark regulations, which have already been approved, are expected to be published during this autumn. They enter into force 20 days from when they are officially published. However, as the benchmarks and the RTS linking to the regulations will probably be approved in 2020, the regulation is not expected to be applied until early 2021.
For the taxonomy regulation, the timeline is less certain. As the member states have just reached agreement in the Council, the trilogues will probably be started in October. After that, the regulation will still have to be checked before the official publication after which it enters into force. The taxonomy packages will be added on as delegated acts as they are prepared by the TEG and approved by the Commission, Parliament and Council. The taxonomy should be fully established by the end of 2021 and so the regulation is expected to be fully applied by the end of 2022.
What does this all mean for investors?
All financial market participants and insurance intermediaries will be affected by the new disclosure regulation. They have to clearly disclose their sustainability policies on their websites and describe how they integrate sustainability risks in their decision-making processes. Additionally, the regulation requires this information to be kept up-to-date and that their marketing communications have to be in line with it.
For those who wish to offer “sustainable” financial products, the implications are slightly more extensive. There are more detailed disclosure requirements regarding the specific sustainability targets, the measuring and monitoring methods and the benchmarks in pre-contractual disclosures, websites and periodical reports. Additionally, sustainable financial products must be aligned with the taxonomy and have a substantial contribution to at least one of the six environmental objectives as well as being compared to the new benchmarks.
- Level 1 Regulation: https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-5524115_en#pe-2018-3333
- Level 2 Report: https://ec.europa.eu/info/files/190618-sustainable-finance-teg-report-taxonomy_en
- Level 1 Regulation: https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-5524115_en#pe-2018-3336
- Level 1 Regulation: https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-5524115_en#pe-2018-3335
- Level 2 Report: https://ec.europa.eu/info/files/190618-sustainable-finance-teg-report-climate-benchmarks-and-disclosures_en