But let us take it step by step.
On 24 May 2018 the Commission presented a first package of measures aimed at promoting sustainable finance, the Sustainable Finance Package. It includes:
1) a proposal for a regulation introducing new disclosure obligations for intermediaries on how they integrate ESG factors (Environmental, Social and Governance) into investment decisions and advisory activity, which led to the adoption of Regulation (EU) 2019/2088;
2) a proposal for a regulation on the taxonomy of environmentally sustainable activities, that is, a shared system for classifying and certifying products and services considered sustainable that can reduce the risk of improper practices (the well-known ‘greenwashing’), which led to the adoption of Regulation (EU) 2020/852;
3) a proposal to amend Regulation (EU) 2016/1011 by introducing two new benchmarks (low carbon and positive carbon impact), which take into account certain aspects of environmental sustainability, which led to the adoption of Regulation (EU) 2019/2089;
4) a public consultation on the amendments made to the delegated acts adopted to implement Directive 2014/65/EU (MiFID II) and Directive (EU) 2016/97 (Insurance Distribution Directive, IDD), which require intermediaries to take clients’ ESG preferences into account in the suitability assessment.
The regulations adopted
Regulation 2019/2088 (Disclosure Regulation) entered into force on 10 March 2021. It introduces harmonised disclosure obligations for financial market participants and financial advisers on information relating to sustainability.
The aim of the Regulation is to strengthen the protection of end investors and improve the information provided to them on sustainability risks, sustainable investment objectives and the promotion of environmental and social characteristics.
The disclosure obligations, that is, transparency obligations, apply at two levels: entity level and product level. They are fulfilled by publishing information on the company’s website, in the pre-contractual disclosures for products and in periodic reports.
The information to be disclosed is of two types: that relating to sustainability risks and that relating to the principal adverse impacts of investment decisions on sustainability factors (the so-called Principal Adverse Impact or PAI).
What, in practical terms, must financial operators and advisers do under this Regulation? They must publish on their website and in pre-contractual disclosures information on the policies adopted to integrate sustainability risks into their investment decision-making processes and the likely impacts that these risks could have on the returns of financial products. If a financial entity decides not to take sustainability factors and risks into account, it must explain why on its website and in its pre-contractual sustainability disclosures.
Regulation 2020/852 (Taxonomy Regulation), which entered into force on 12 July 2020, sets the criteria for the environmental sustainability of economic activities.
It is essentially a common classification system that gives finance (which must indicate how sustainable an investment actually is), governments (which must set incentives for green companies) and companies (which must report on their environmental impact) appropriate definitions of when economic activities can be considered (and described as) environmentally sustainable.
An economic activity is considered environmentally sustainable if it meets four requirements:
a) it contributes substantially to at least one of the six environmental objectives identified by the regulation:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
b) it does not significantly harm any other environmental objective;
c) it is carried out in compliance with minimum social safeguards;
d) it complies with the technical criteria set by the Commission.
The Regulation applies to:
1) measures adopted by the Union or the Member States that lay down requirements for financial market participants or issuers in relation to financial products or corporate bonds made available as environmentally sustainable;
2) financial market participants that make financial products available;
3) undertakings subject to the obligation to publish a non-financial statement or a consolidated non-financial statement pursuant to Article 19a or Article 29a of Directive 2013/34/EU.
The Taxonomy then sets the technical screening criteria for achieving each environmental objective, broken down by macro-sector of the economy and by individual activity.
Here is the list of the macro-sectors of the economy covered by the Taxonomy:
- Forestry
- Environmental protection and restoration activities
- Manufacturing
- Energy
- Water supply, sewerage, waste management, remediation
- Transport
- Construction and real estate
- IT and communications
- Professional, scientific and technical activities
- Financial and insurance activities
- Education
- Health and social services
- Arts, entertainment and recreation
The details of the thresholds to be met will be set out in specific documents called ‘delegated acts’.
For example: how much CO2 an activity may emit at most, how much material coming out of the construction phase must be sent, as a minimum, for recycling and reuse, which climate risks need to be examined in depth in the infrastructure’s risk and resilience assessment, and so on.
1 - to be continued
