ESG: the April 2021 package of the European Commission and beyond – Finance and Banking

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EU institutions continue to shape the EU regulatory environment in the ESG area.

First, on April 20, 2021, a political agreement was reached on the text of the European climate law , a new directly applicable EU regulation. It enshrines in law the EU’s commitment to achieve climate neutrality by 2050 and the intermediate goal of reducing net greenhouse gas emissions by at least 55% by 2030, compared to at 1990 levels. It contains a commitment to negative emissions after 2050 and provides for the creation of the European Science Advisory Board on Climate Change, which will provide independent scientific advice. The finalized text is expected to be adopted shortly.

Second, through the so-called “April package“published on April 21, 2021, significant progress has been made in the development of standards and reporting on sustainable development disclosures through the adoption of a number of draft legal instruments:

I. The Delegated Act of Taxonomy of the EU on Climate

the Climate taxonomy Delegated act is a delegated regulation supplementing the Taxonomy regulation . It establishes the technical selection criteria for determining when an economic activity is considered to contribute substantially to climate change mitigation or climate change adaptation within the meaning of Article 9 of the Taxonomy Regulation and to determine whether this economic activity does not cause significant damage to other environmental objectives.

The Taxonomy Climate Delegated Act contains the very first ‘green list’ – the EU’s classification system for determining whether activities are ‘environmentally sustainable’ with regard to climate change adaptation and mitigation goals of climate change and the absence of significant damage to other environmental objectives resulting from Article 9 of the taxonomy regulation. The applicable technical selection criteria are set out in the annexes.

A classification with regard to the other objectives of article 9 of the taxonomy regulation will be published for consultation before the end of this year. Sectors not included in the delegated act on climate taxonomy (agriculture, certain energy sectors and manufacturing activities) will be covered in another delegated act later this year.

Who is concerned ? Companies subject to the obligation to publish non-financial statements in accordance with the Directive on non-financial information (“NFRD “), which sets the rules for the disclosure of non-financial and diversity information by certain large companies. Insofar as their activities are aligned with the taxonomy regulation, they will have to refer to the climate taxonomy delegated act. of public interest with at least 500 employees, total assets of 20 million euros and / or net turnover of 40 million euros and which are one of the following: (i) entities of the EU which have transferable securities admitted to trading on an EU regulated market (ii) EU credit institutions; (iii) EU insurance companies, or (iv) credit institutions EU designated by Member States as public interest entities Following the CSRD proposal (see below), the application will be extended.

When will it apply? The text was formally adopted on June 4, 2021. It will apply from January 1, 2022.

II. The proposal for a directive on corporate sustainability reporting

The proposal for a directive on reporting on the sustainable development of enterprises (“CSRD “) revise and strengthen the disclosure rules in the NFRD, in place since 2018, to ensure alignment with the Sustainable Finance Disclosure Regulation (“SFDR “) and the taxonomy regulation and to create a coherent and coherent flow of information on sustainability throughout the financial value chain. The main innovations proposed are:

  • expanding the scope of reporting requirements in the NFRD;
  • an obligation to audit declared sustainability information so that it is reliable;
  • the introduction of more detailed reporting requirements and a reporting obligation in accordance with mandatory EU sustainability reporting standards, including taxonomy;
  • the obligation to publish all information as part of corporate management reports, and disclosed in a digital machine-readable format.

It is also important in this regard to Delegated act , another delegated regulation supplementing the taxonomy regulation, adopted by the Commission on July 6, 2021. This text specifies the content, methodology and presentation of the information to be disclosed by non-financial and financial companies in accordance with article 8 of the regulation taxonomy how and to what extent their activities are associated with activities classified as environmentally sustainable.

Who is concerned ? All large companies within the meaning of Accounting directive , whether listed or not, and without a threshold (see the current threshold of 500 NFRD employees mentioned above). According to the Commission, around 50,000 EU companies will have to follow the new standards, compared to 11,000 companies currently covered. The Commission also proposes to further extend the scope to include listed SMEs, with the exception of listed micro-enterprises.

When will it apply? The legislative process takes about 18 months. According to the CSRD project, companies will have to apply the new rules in their 2024 report covering fiscal year 2023.

III. Six delegated acts on sustainability preferences, fiduciary obligations and product governance

Six recently adopted amending delegated acts (“Delegated acts“) aim to better reflect sustainability preferences in insurance and investment advice, on the one hand, and sustainability considerations in product governance and fiduciary duties, on the other. the existing rules under the Insurance Distribution Directive (IDD), MiFID II, the Solvency II Directive, the UCITS Directive and the Alternative Investment Fund Managers Directive (AIFMD). here .

In particular, the following implications can be noted:

  • Insurance and investment advisers will be required to obtain information not only on the client’s investment knowledge and experience, his ability to bear losses and his risk tolerance as part of the assessment of the client. suitability, but also on their sustainability preferences.
  • The existing rules on fiduciary obligations in delegated acts for the asset management, insurance, reinsurance and investment sectors are clarified to also encompass sustainability risks, such as the impact of climate change and environmental degradation on the value of investments. Identifying conflicts of interest must also take into account sustainability concerns.
  • Product approval processes and target market definitions must take into account product sustainability factors.

Who is concerned ? UCITS managers, management and investment companies, insurance intermediaries and (re) insurance companies as well as MiFID companies manufacturing and distributing financial instruments will have to adapt their documentation and practices.

When will they apply? By Q3 2022 for target market product determinations and product information for all banks, insurers and fund managers as well as distributors.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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