Today’s publication of the Sustainable Finance Package will impact large corporates, as well as financial institutions, including asset managers, insurers and others. New rules on sustainability reporting, taxonomy, product governance and more are taking shape. This year and 2022 will require specific action from our clients to comply with the EC’s ambitious plans to green the EU economy. Read more below from Stibbe’s ESG team of specialists.
On 21 April 2021, the European Commission adopted the Sustainable Finance Package, which is a comprehensive package of measures to help improve the flow of money towards sustainable activities across the European Union. The package is comprised of the EU Taxonomy Climate Delegated Act, a proposal for a new Corporate Sustainability Reporting Directive (CSRD) and six amending Delegated Acts on fiduciary duties, investment and insurance advice. The package is an essential part of the European Green Deal.
EU Taxonomy Climate Delegated Act
The EU Taxonomy Climate Delegated Act is the first set of technical screening criteria to define which activities contribute substantially to two of the environmental objectives under the Taxonomy Regulation: climate change adaptation and climate change mitigation. These criteria are based on scientific advice from the Technical Expert Group (TEG) on sustainable finance.
The EU Taxonomy is a science-based transparency tool. It will provide market participants, investors and companies with a common understanding of green economic activities: activities that make a substantial contribution to the aims of the Green Deal. The purpose of this classification system is to avoid greenwashing. It will also introduce disclosure obligations on companies and financial market participants.
The EU Taxonomy Delegated Act is a living document, and will continue to evolve over time, in light of developments and technological progress. The criteria will be subject to regular review. This will ensure that new sectors and activities, including transitional and other enabling activities, can be added to the scope over time.
Next steps: The Delegated Act will be formally adopted at the end of May once translations are available in all EU languages. Once formally adopted, the EU Taxonomy Climate Delegated Act will be scrutinised by the European Parliament and the Council (four months and extendable once by two additional months).
Corporate Sustainability Reporting Directive
The proposal for a new Corporate Sustainability Reporting Directive (CSRD) revises and strengthens the existing rules introduced by the Non-Financial Reporting Directive (NFRD). It aims to create a set of rules that will – over time – bring sustainability reporting on a par with financial reporting. It will extend the EU's sustainability reporting requirements to all large companies and all listed companies. This means that nearly 50,000 companies in the EU will now need to follow detailed EU sustainability reporting standards, an increase from the 11,000 companies that are subject to the existing requirements. The Commission proposes the development of standards for large companies and separate, proportionate standards for SMEs, which non-listed SMEs can use voluntarily.
The proposal aims to ensure that companies report reliable and comparable sustainability information needed by investors and other stakeholders. It will ensure a consistent flow of sustainability information through the financial system. Companies will have to report on how sustainability issues, such as climate change, affects their business and the impact of their activities on people and the environment.
The proposal will also simplify the reporting process for companies. Many companies currently use different sustainability reporting standards and frameworks. The proposed EU sustainability reporting standards should be a “one-stop-shop”, providing companies with a single solution that meets the information needs of investors and other stakeholders.
Next steps: the Commission will engage in discussions with the European Parliament and the Council.
Six amending Delegated Acts
The six amendments to Delegated Acts on investment and insurance advice, fiduciary duties, and investment and insurance product oversight and governance will ensure that financial firms, e.g. advisers, asset managers or insurers, include sustainability in their procedures and their investment advice to clients.
On investment and insurance advice: when a financial adviser assesses a client's suitability for an investment, they now need to discuss the client's sustainability preferences.
On fiduciary duties: the amendments clarify the obligations of a financial firm when assessing its sustainability risks, such as the impact of floods on the value of investments.
On investment and insurance product oversight and governance: manufacturers of financial products and financial advisers will need to consider sustainability factors when designing their financial products.
Next steps: The six amendments to Delegated Acts will be scrutinised by the European Parliament and the Council (three month periods and extendable once by three additional months) and are expected to apply as of October 2022.