Sean Kidney, chief executive of the Climate Bonds Initiative:
The People’s Bank of China chose to also release its updated taxonomy, called the “Green Projects Catalogue”. The update brings it closer to the EU Taxonomy; it also incorporates language around Do No Significant Harm (DNSH) principle (taking a page from the EU Taxonomy) and also indicates the future possibilities of rolling out a “transition finance” standard.
The timing of the release, in the lead up to the Biden Climate Summit, is a signal to the market of coordinated action between the EU and China to address climate change.
Where next on global standards?
Next will be the European Commission V2.0 Action Plan on Sustainable Finance, due out soon. This will have a host of new measures to mobilize capital for sustainable solutions; we expect it to pick up more of the recommendations made in the 2017 report of the High-level Expert Group on Sustainable Finance report.CEO ClimatThe EU’s work on Taxonomy has galvanized similar projects around the world, from Colombia and South Africa to Singapore and Mongolia. It has engendered a global debate about what should be counted as relevant to addressing our climate challenges.
Meanwhile, the PBOC and China’s other regulators are steadily working towards harmonization.
“The green revolution is happening, EU and China have made huge advancements in describing what is sustainable invesment for the markets.” – Sean Kidney, CEO Climate Bonds Initiative.
Source: CEO Climate Bonds Initiative.
Sustainable Finance and EU Taxonomy: Commission takes further steps to channel money towards sustainable activities
The European Commission has adopted an ambitious and comprehensive package of measures to help improve the flow of money towards sustainable activities across the European Union. By enabling investors to re-orient investments towards more sustainable technologies and businesses, today’s measures will be instrumental in making Europe climate neutral by 2050. They will make the EU a global leader in setting standards for sustainable finance.
The package is comprised of:
- The EU Taxonomy Climate Delegated Act aims to support sustainable investment by making it clearer which economic activities most contribute to meeting the EU’s environmental objectives. The College of Commissioners today reached a political agreement on the text. The Delegated Act will be formally adopted at the end of May once translations are available in all EU languages. A Communication, also adopted by the College today, sets out the Commission’s approach in more detail.
- A proposal for a Corporate Sustainability Reporting Directive (CSRD). This proposal aims to improve the flow of sustainability information in the corporate world. It will make sustainability reporting by companies more consistent, so that financial firms, investors and the broader public can use comparable and reliable sustainability information.
- Finally, six amending Delegated Acts on fiduciary duties, investment and insurance advice will ensure that financial firms, e.g. advisers, asset managers or insurers, include sustainability in their procedures and their investment advice to clients.
The European Green Deal is Europe’s growth strategy that aims to improve the well-being and health of citizens, make Europe climate-neutral by 2050 and protect, conserve and enhance the EU’s natural capital and biodiversity.
As part of that effort, companies need a comprehensive sustainability framework to change their business models accordingly. To ensure the transition in finance and prevent greenwashing, all elements of today’s package will enhance the reliability and comparability of sustainability information. It will put the European financial sector at the heart of a sustainable and inclusive economic recovery from the COVID-19 pandemic and the longer-term sustainable economic development of Europe.
EU Taxonomy Climate Delegated Act
The EU Taxonomy is a robust, science-based transparency tool for companies and investors. It creates a common language that investors can use when investing in projects and economic activities that have a substantial positive impact on the climate and the environment. It will also introduce disclosure obligations on companies and financial market participants.
Today’s Delegated Act, politically agreed today by the College of Commissioners, introduces 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. It follows extensive feedback from stakeholders, as well as discussions with the European Parliament and Council. This Delegated Act would cover the economic activities of roughly 40% of listed companies, in sectors which are responsible for almost 80% of direct greenhouse gas emissions in Europe. It includes sectors such as energy, forestry, manufacturing, transport and buildings.
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.
A new Corporate Sustainability Reporting Directive
Today’s proposal 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.
Overall, 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 are currently under pressure to use an array of 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.
Amendments to Delegated Acts on investment and insurance advice, fiduciary duties, and product oversight and governance
Today’s six amendments encourage the financial system to support businesses on the path towards sustainability, as well as supporting existing sustainable businesses. They will also strengthen the EU’s fight against greenwashing.
- On investment and insurance advice: when an adviser assesses a client’s suitability for an investment, they now need to discuss the client’s sustainability preferences.
- On fiduciary duties: today’s 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.
Members of the College said:
Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, said: “Europe was an early leader in reforming the financial system to support investments for climate change. Today, we are taking a leap forward with the first-ever climate taxonomy which will help companies and investors to know whether their investments and activities are really green. This will be essential if we are to mobilise private investment in sustainable activities and make Europe climate-neutral by 2050. This is a ground-breaking step for which we have consulted far and wide. We left no stone unturned in seeking a balanced, science-based outcome. We are also proposing improved rules on sustainability reporting by companies. By developing European standards, we will build on and contribute to international initiatives.”
Mairead McGuinness, Commissioner responsible for financial services, financial stability and the Capital Markets Union, said: ““The financial system plays a crucial role in the delivery of the EU Green Deal, and significant investments are required to green our economy. We need all companies to play their part, both those already advanced in greening their activities and those who need to do more to achieve sustainability. Today’s new rules are a game changer in finance. We are stepping up our sustainable finance ambition to help make Europe the first climate-neutral continent by 2050. Now is the time to put words into action and invest in a sustainable way.”
Background and next steps
The EU has taken major steps over the past number of years to build a sustainable financial system that contributes to the transition towards a climate-neutral Europe. The EU Taxonomy Regulation, the Sustainable Finance Disclosure Regulation and the Benchmark Regulation form the foundation of the EU’s work to increase transparency and provide tools for investors to identify sustainable investment opportunities.
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).
Regarding the CSRD Proposal, the Commission will engage in discussions with the European Parliament and Council.
The six amendments to Delegated Acts on investment and insurance advice, fiduciary duties, and product oversight and governance 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.
Source: European Commission
AFME welcomes EC legislative proposal on sustainability disclosures but emphasises the need for appropriate sequencing of regulatory measures
AFME welcomes the European Commission’s publication of the legislative proposal for a Corporate Sustainability Reporting Directive, revising rules introduced by the Non-Financial Reporting directive (NFRD).
Jacqueline Mills, Head of Advocacy for AFME, says “We strongly believe that the development of EU sustainability reporting framework, going forward, should ensure consistency and a logical sequence between disclosure requirements imposed on financial institutions and their borrowers and investees. AFME stands ready to support the European Commission and co-legislators in achieving this objective through the proposals to revise the existing NFRD”.
The new Directive proposal marks a significant milestone towards enhancing the availability and reliability of ESG information and introduces a range of crucial provisions. AFME fully supports the following provisions among others:
- Developing mandatory EU sustainability reporting standards following the double-materiality principle.
- Extending the scope of mandatory sustainability reporting requirements to include all companies listed on EU Regulated Markets, except for micro-undertakings, as well as all large, including private, companies.
- Subjecting sustainability information to mandatory third-party assurance – the statutory auditor or audit firm should express an opinion based on a limited assurance engagement about the compliance of the sustainability reporting with the reporting standards.
- Establishing equivalence mechanisms for sustainability reporting standards used by third country issuers. International regulatory convergence in ESG reporting should be a key consideration in the further elaboration of the European reporting framework.
However, AFME also stresses the importance of appropriately sequencing the reporting obligations applying to financial institutions and their clients. Jacqueline Mills said:
“We generally welcome the proportionate approach to be applied to SMEs where listed SMEs will be expected to comply with the new standards three years after the new corporate sustainability reporting regime enters into application and where voluntary simplified reporting standards would be developed for other types of small and medium entities. However, we are concerned that this could further exacerbate the scope and timing mismatch between certain reporting obligations that financial institutions could be required to comply with and the reporting obligations imposed on financial institutions’ SME borrowers and investee companies. For example, the recent advice by the European Banking Authority (EBA) to the European Commission proposes that credit institutions and investment firms would report on a range of KPIs, including a Green Asset Ratio (GAR) under the Taxonomy Regulation, that would include, on a mandatory basis, SME portfolios in the calculation. The EBA recommended that banks be allowed to use estimated data for such portfolios until 30 June 2024, followed by the reporting based on the “real data”. According to the proposals published today, listed SMEs will not be expected to report sustainability information until the year of 2027 and the rest might not be sufficiently encouraged to do so at all, considering that the standard is recommended as voluntary.”
Triodos Investment Management: Criteria for sustainable taxonomy are a step in the right direction
On April 21, the European Commission published a list of criteria that determine when economic activities can be labeled as ‘sustainable’. The rules laid down in this so-called taxonomy determine the direction in which investments, such as investments, will flow. According to Triodos Bank, this green list is a step in the right direction. Especially because an earlier proposal to qualify natural gas as sustainable has – for the time being – been withdrawn.
The European Commission (EC) has indicated that the burning of all fossil fuels cannot be regarded as sustainable. In doing so, the EC follows the scientific evidence that burning fossil fuels contributes to global warming. Triodos Bank also believes that fossil fuels can never be classified as sustainable.
However, the EC has decided at a later date to reconsider whether the combustion of natural gas can be classified as sustainable, so that it can be used in countries that want to refrain from using coal.
The combustion of biomass is also considered sustainable in the taxonomy. Triodos Bank believes that the financial sector should be very cautious about financing wood combustion because of the negative consequences for the environment and biodiversity of CO2 emissions and forest clearing.
The EC has also decided to exclude agriculture for the time being pending a new common agricultural policy Triodos Bank believes it is important that the eventual classification of agriculture in taxonomy contributes to an agricultural system that does not harm our planet, human health and social equality . Such a taxonomy would also do justice to the Farm to Fork strategy of the European Commission.
The taxonomy criteria also relate to human rights: business activities are not sustainable if they benefit the environment, but ignore human rights. This is an important addition when it comes to stimulating a positive impact on people and the environment.