"It can‘t go on like this!" This statement is not only made by the young people who pass by the windows of our office every Friday morning. In fact, this statement was already made binding by the Paris Climate Change Agreement in December 2015. The Intergovernmental Panel on Climate Change (IPCC) concludes in its reports that man-made drivers are "very likely" to impact natural livelihoods. The resulting "something must change" was formulated by the United Nations in 17 Sustainable Development Goals (SDGs). However, these goals are not limited to the one environmental aspect. They take a holistic view, seeing humanity in its global responsibility for today and tomorrow. Three main groups of these goals can be distinguished. Ecological aspects (ecological), more social aspects (social) and aspects of responsible leadership (governance) are emphasized (ESG). In order to achieve these, new means are required, or the existing ones must be steered in this direction.
Action plan for financing sustainable growth
The European Commission recognised that the financial system has a key role to play in this. At the end of 2016, it set up a High-level Expert Group on Sustainable Finance (HLEG). Based on the final report1 of this group, published in early 2018, a first Action plan on sustainable finance2 was adopted.
This 10-measure action plan identified all stakeholders and consisted of three building blocks.
First, a common classification of economic activities that contribute significantly to environmental goals was created based on science-based criteria.
Second, comprehensive disclosure obligations were imposed on non-financial and financial companies for the circumstances identified on the basis of these criteria, in order to provide investors with the necessary information for sustainable investments.
Third, the Commission provided investors with tools such as benchmarks, standards and labels to enable them to invest in sustainable financial products. With so many regulations, directives and proposals, it is easy to lose sight of the big picture.
But all of the action plan's 10 measures, divided into three thematic areas, can be found in one of the three building blocks.
In formulating the measures, the Commission took an economic perspective. It identified as the objective of the first thematic area the reorientation of capital flows towards a more sustainable economy.
- On the one hand, it wanted to promote investment in sustainable projects (third measure), which was ensured by the European Green Deal Investment Plan (EGDIP) and the InvestEU Programme Directive3. Secondly, sustainability considerations should be taken into account in financial advice (fourth measure). To this end, the Commission adopted three delegated regulations on the inclusion of sustainability factors in financial instruments4 and insurance investment products.5 For its part, the European Securities and Markets Authority (ESMA) issued guidelines on the inclusion of risks in investment products6. Sustainability benchmarks (fifth measure) were established by the Benchmark Regulation,7 followed by several delegated acts8 and a proposal for a regulation.9
- The core of the first topic area was the introduction of an EU classification system for sustainable activities (first measure), which was developed by the Taxonomy Regulation.10 On the one hand, it contains criteria for determining whether an economic activity is to be classified as environmentally sustainable, in order to be able to determine the degree of environmental sustainability of an investment,11 but also disclosure obligations with regard to environmentally sustainable economic activities for companies that are obliged to publish non-financial information in accordance with the Accounting Directive.12 Two delegated regulations have already been adopted,13 and four more are to follow, in order to regulate all six environmental objectives mentioned in the regulation in more detail.
- As a culmination of the first strand, the Commission published a proposal for a Regulation on EU Green Bonds (EuGB)14 (second measure) in early July 2021. This regulation sets out uniform requirements for bond issuers for European green bonds and creates a registration system and a supervisory framework for external reviewers of such bonds.15 However, it appears difficult that the requirements of the EuGB are linked to the Technical Screening Criteria (TSC). However, these criteria, which are based on the Taxonomy Regulation, can be adjusted over time. As a result, the bonds would no longer comply with the requirements from the time of the adjustment. It is true that a transitional period of five years is provided for this case. Nevertheless, a residual risk remains.
In the second thematic area, the Commission focuses on financial market actors, namely sustainability considerations are to be anchored in risk management,
- for example, by making ratings and research on sustainability aspects available (sixth measure). ESMA provided rough guidance on this in its reports16 and the Commission in a study.17 To clarify the obligations of institutional investors and asset managers (seventh measure), the Commission adopted the Disclosure Regulation.18 This Regulation establishes transparency rules for financial market participants and financial advisors, including obligations to disclose their own strategies for integrating sustainability risks into investment decision-making processes or investment advisory or insurance advisory activities.
- Sustainability aspects should also be given greater consideration in banking supervisory regulations (eighth measure). In this context, the European legislator created the obligation to disclose ESG risks.19 The European Banking Authority (EBA) will develop the necessary technical standards by the end of 2021. In its mandated20 report21, the EBA also recommends the inclusion of ESG risks in the business strategies, governance, risk management and supervision of banks. Finally, by June 2025, the EBA is required to consider whether a specific supervisory treatment of risk exposures related to assets or activities that are materially linked to environmental and/or social objectives would be warranted22. In advance, it published its Action Plan on Sustainable Finance, which sets out the steps to be taken by that date.23
The third theme is the promotion of transparency and sustainability.
- With regard to disclosure and accounting (ninth measure), the Commission has drawn up a proposal for a directive on corporate sustainability reporting (CSRD)24. This obliges companies to include in their management reports information on the sustainability-relevant effects of their activities, as well as the effects of sustainability aspects on the course of business, business results and the situation of the company25. Secondly, the Commission published an addendum to the guidelines on climate-related reporting.26 This was followed by further delegated acts on disclosure, such as for alternative investment fund (AIF) managers,27 in relation to undertakings for collective investment in transferable securities (UCITS),28 and on product monitoring obligations.29 Incentives for disclosure were not created by legal obligations alone. In its guidance document30, the European Central Bank (ECB), on the one hand, formulates expectations of banking supervision with regard to risk management and disclosures. In this context, ESG risks do not constitute a separate risk category, but must be considered as a potential impact on existing risk categories and these circumstances must be disclosed when reporting them. On the other hand, it recently stated in its monetary policy strategy to consider climate risks in its programme to purchase corporate sector securities.31
- The Commission's final objectives were to promote sustainable corporate governance and to reduce short-termism in capital markets (tenth measure). Specifically, it published two studies concluding that the social impact of legally mandated due diligence in supply chains32 greater than that of voluntary due diligence,33 and that sustainable corporate governance at board level is a desirable objective to minimise short-termism.34 In response to the ensuing public consultation,35 a proposal on company law and corporate governance is expected in 2021. European regulators have also issued their opinions on long-term investment strategies and recommend stronger regulations in this regard.36
Strategy for financing a sustainable economy
Strengthened by the European Green Deal at the37 at the end of 2019 and the package of proposals38 to transform the economy to meet climate targets in July 2021, the Commission published the Strategy for financing the transition to a sustainable economy as a new edition of the Action Plan, after which it was almost fully met.39 40 This provides for six measures in four main areas (I. - IV.).
- The first main area describes the financing of the real economy's transition to sustainability (I.),
- in which the Commission will support the financing of intermediate steps on the road to sustainability (first action), for example by financing certain economic activities and extending the EU taxonomic framework.
- Towards a more inclusive framework for sustainable finance (II.),
- the course is now to open up access to sustainable finance to the widest possible range of investors (second action). In this context, the Commission intends to explore the use of digital technologies for sustainable finance and to prepare for better protection against climate and environmental risks by improving insurance coverage.
- The contribution of the financial sector to sustainability (III.)
- is the main central area of the new strategy. It alone contains three measures. First, the Commission intends to take further steps on accounting, ratings and prudential regulation (third action).
- Secondly, work will be done to improve the contribution of the financial sector to the sustainability goals (fourth action), for example by intensifying science-based definition, disclosure and monitoring of the financial sector's commitments.
- The aim is to monitor the transition in an orderly manner and ensure the integrity of the EU financial system (fifth action). To this end, the Commission intends to give supervisory authorities powers to tackle greenwashing and to develop a robust supervisory framework. The third main area is guided by the dual materiality perspective41. According to this, not only the impact of the environment on the company must be considered, but also the impact of the company on the environment, as this indirectly affects the company.
- Inspired by the 17th SDG (strengthen international partnerships), the Commission intends to promote global ambitions (IV.)
- In addition to the already existing International Platform on Sustainable Finance, the development of international initiatives and standards for sustainable finance will be promoted (sixth action).
The number of legal acts and their level of detail may initially overwhelm the legal practitioner. If the regulations are divided into modules and areas, three focal points can be identified:
- First, regulations were issued for the determination of ESG standards, thus creating a basis for (with restrictions) legally secure businesses.
- Second, the European legislator enacted disclosure obligations at a high pace, always for the specific actor vis-à-vis its respective investor. These do cause a high compliance effort. However, this approach is to be welcomed in comparison to possible alternatives. After all, the legislator assumes that the investor is a responsible person who does not need to be forced to make decisions, but rather steers his actions according to well-considered points of view. However, investors must not gamble away this degree of trust.
- Third, the Commission and supervisors developed recommendations on the integration of ESG factors into the business operations of companies (including banks). Further provisions are pending on this. First, there is discussion on whether ESG factors should influence an existing credit risk, either by downgrading the risk if they are included or by increasing it if they are not. Second, the creation of separate ESG risk categories has been considered. However, the qualification of ESG risks as sub-risks of the existing risk categories will probably not change.
In particular, the credit market is more prominent in the EU than the capital market compared to the Anglo-Saxon region. Despite many efforts to create a European capital markets union, however, the focus will not shift in the short term. This means that credit institutions in the EU will continue to play a central role in economic transformation. The development of internal banking guidelines with a view to lending, among other things, will have to be watched with interest. The ECB,42 which has been a common refinancing partner for EU banks since the banking crisis in 2008 and can therefore impose stricter ESG requirements, will presumably also play a special role here.
1 Final Report 2018 by the High-Level Expert Group on Sustainable Finance, 31 January 2018.
2 Commission Communication of 8.3.2018 COM/2018/097 final.
3 Directive (EU) 2021/523.
4 Commission Delegated Regulation (EU) 2021/1253 of 21 April 2021.
5 Commission Delegated Regulation (EU) 2021/1257 of 21 April 2021; Commission Delegated Regulation (EU) 2021/1256 of 21 April 2021.
6 European Securities and Markets Authority, Final Report on Guidelines on certain aspects of the MiFID II suitability requirements, 28.5.2018.
7 Regulation (EU) 2019/2089.
8 Commission Delegated Regulation (EU) 2020/1816 of 17 July 2020; Commission Delegated Regulation (EU) 2020/1817 of 17 July 2020; Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020.
9 Proposal for a Regulation amending Regulation (EU) 2016/1011 as regards reference values for low-carbon investments and reference values for investments with a favourable carbon footprint of 24.5.2018 COM/2018/355 final.
10 Regulation (EU) 2020/852.
11 Art. 1(1) Regulation (EU) 2020/852.
12 Directive 2013/34/EU.
13 Commission Delegated Regulation of 6.7.2021 C/2021/2800 final; Commission Delegated Regulation of 6.7.2021 C/2021/4987 final.
14 Proposal for a Regulation on European Green Bonds of 6.7.2021 COM(2021) 391 final.
15 Art. 1 COM(2021) 391 final.
16 European Securities and Markets Authority, Technical advice to the European Commission on sustainability considerations in the credit rating market, ESMA 33-9-321, 18.7.2019; European Securities and Markets Authority, Final report on guidelines on disclosure requirements applicable to credit ratings, ESMA33-9-320, 18.7.2019.
17 European Commission and Environmental Resources Management, Study on sustainability-related ratings, data and research, 6.1.2021.
18 Regulation (EU) 2019/2088.
19 Art. 434a and 449a Regulation (EU) 575/2013, shall apply from 31.12.2022.
20 Article 98(8) Directive 2013/36/EU.
21 European Banking Authority, Report on management and supervision of ESG risks for credit institutions and investment firms EBA/REP/2021/18, 23.6.2021.
22 Art. 501c Regulation (EU) 575/2013.
23 EBA action plan on sustainable finance, 6.12.2019.
24 Proposal for a Directive of 21.04.2021 COM(2021) 189 final.
25 Art. 19a Directive 2013/34/EU. Applies to large companies, and from 1 January 2026 to small and medium-sized enterprises.
26 Guidelines on reporting non-financial information: Addendum on climate-related reporting of 20.6.2019 C/2019/4490.
27 Commission Delegated Regulation (EU) 2021/1255 of 21 April 2021.
28 Commission Delegated Directive (EU) 2021/1270 of 21 April 2021.
29 Commission Delegated Directive (EU) 2021/1269 of 21 April 2021.
30 ECB Guidance on climate and environmental risks - supervisory expectations on risk management and disclosures, 20.11.2020.
31 ECB action plan to integrate climate change considerations into its monetary policy strategy, 8.7.2021.
32 Germany, like other European countries, has already created such a law, Supply Chain Sourcing Obligations Act of 16 July 2021 (BGBl. I p. 2959).
33 Study on due diligence requirements through the supply chain, 20.2.2020.
34 Study on directors' duties and sustainable corporate governance, 29.7.2020.
36 European Banking Authority, Report on undue short-term pressure from the financial sector on corporations, 18.12.2019; European Insurance and Occupational Pensions Authority, 'Potential undue short-term pressure from financial markets on corporates: Investigation on European insurance and occupational pension sectors', EIOPA-BOS-19-537, 18.12.2019; European Securities and Markets Authority, Report on undue short-term pressure on corporations, ESMA30-22-762, 18.12.2019.
37 Commission Communication of 11.12.2019 COM(2019) 640 final.
38 Communication from the Commission of 14.7.2021 COM(2021) 550 final.
39 Commission Staff Working Document on the Strategy for the Implementation of the 2018 Action Plan on Financing Sustainable Growth, 6.7.2021 SWD(2021) 180 final.
40 Communication from the Commission of 6.7.2021 COM(2021) 390 final.
41 Cf. 2.2 Guidelines on reporting non-financial information: Addendum on climate-related reporting of 20.6.2019 C/2019/4490.
42 See ECB action plan to incorporate climate change considerations into its monetary policy strategy,
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