Sweeping measures made to boost sustainability, climate, but industry interests holds too much sway
- Amendments to Delegated Acts on investment and insurance advice, fiduciary duties, and product oversight and governance: a giant leap towards mainstreaming sustainability in financial system and fight against greenwashing
- EU taxonomy: Climate-related Delegated Acts should be science-based
- Corporate Sustainability Reporting Directive: a major step towards improved transparency, but fails to keep high-risk, medium-sized companies within mandatory sustainability-related reporting scope
EU Taxonomy Climate Delegated Acts: Science-based criteria a must-have
No defensible line of logic justifies watering down the EU taxonomy climate Delegated Acts criteria for forestry and bioenergy. They are in breach of the regulation which specifies that the criteria must be science-based. The Commission decision delivers an untimely blow to the intent of the EU taxonomy and Green Deal. Concerns raised must be addressed by the European Commission during its proposed review process.
“Economic and political interests have diluted the criteria, conjuring them outside the science-based approach followed by the Technical Expert Group (TEG) and required by the regulation,” says Thierry Philipponnat, head of research and advocacy at Finance Watch and a member of the Platform on Sustainable Finance, which replaced TEG.
Plucking out criteria on nuclear power and gas from the Delegated Acts allows for further analysis and debate in a context where no circumstance exists under which gas, as a fossil fuel, can be considered as a sustainable source of energy. Meanwhile, a question will surface around nuclear power falling under the ‘do no significant harm’ criterion of the EU taxonomy. Some voices in the debate, businesses and Member States alike, may seek to exploit this opportunity, however, to weaken crucial technical provisions. The science-based approach must supplant the politics.
Corporate Sustainability Reporting Directive: a major step, but mid-size firms must report
The proposal for a Corporate Sustainability Reporting Directive, revising the Non-Financial Reporting Directive, unveiled by the Commission strikes a right balance. Concern mounts, however, that high-risk, medium-sized companies find themselves out of the scope of mandatory sustainability-related disclosures. Such companies can deliver a profound and wide-reaching impact on the environment and society.
“Sustainability risks may lead to widespread and profound financial impact on companies and their operations. Neglecting sustainability risks, whether by large or medium-sized companies, has knock-on effects that can lead to economic disruption and financial instability,” says Thierry Philipponnat.
SMEs with securities listed on EU regulated markets were granted a three-year delay to start their sustainability reporting. While this could be sensible in “business as usual” circumstances, putting off publication of initial sustainability reports to 2027 looks wholly inappropriate given the looming climate meltdown.
Finance Watch also warns against a different treatment of SMEs with securities listed on EU regulated markets and on multilateral trading facilities (MTFs). This would contribute to market fragmentation and create investor protection concerns.
“If a company is sufficiently mature and resourceful to go through an IPO, whether on an EU regulated market or an MTFs, no strong reason exists to exempt it from reporting on sustainability risks faced and its sustainability impacts on the environment and society,” adds Philipponnat.
“Investors need to receive corporate sustainability-related information not only because of their sustainability preferences but to understand actual and / or potential future financial implications of sustainability risks businesses face.”
Finance Watch looks forward to working together with the EU co-legislators to make this review a success.
For more detailed analysis read a joint statement from Finance Watch and NGOs.
Amendments to Delegated Acts on investment and insurance advice, fiduciary duties, and product oversight and governance: Overshadowed by EU taxonomy tussle, a giant leap towards sustainability being “mainstreamed” into the financial system
Finance Watch backs the European Commission on an ambitious set of rules that integrate sustainability considerations into investment, advisory and disclosure processes in a consistent manner across sectors.
These targeted but crucial adjustments to MiFID II and IDD – along with several other financial services rules – were overshadowed by the fight over the EU taxonomy climate delegated acts. Meanwhile, these legislative changes will contribute greatly towards a push to embed environmental, social, and governance, or ESG, considerations within the core of the financial system while simultaneously thwarting efforts to greenwash.
Financial advisors play a highly important role advising the average citizen who oftentimes faces fiddly financial choices. People often lack deep financial know-how to muddle through, which hampers unlocking latent investments from households to support Europe’s transition to a sustainable future. These new rules rightly require the financial industry to ask clients for their sustainability preferences and take them on board while making investment decisions.
Philipponnat concluded: “The new rules change the nature of the game. Advisers, asset managers and insurers will need to weave in sustainability into their investment and advisory playbook.”
Notes to editors
About the EU taxonomy
A flagship project of the European Commission, the EU taxonomy establishes a classification of environmentally sustainable economic activities. It will play a crucial role in delivering on European sustainability objectives, in particular its climate aims and the EU Green Deal, and in orienting capital flows towards a sustainable economy. The Delegated Acts published present a first set of technical screening criteria that financial institutions and companies will have to follow for climate-related objectives while preparing their taxonomy-related disclosures. Article 19 of the EU taxonomy regulation specifies that the technical screening criteria must be based on conclusive scientific evidence.
About the Corporate Sustainability Reporting Directive (CSRD)
The Commission proposal revises and strengthens the existing rules under the Non-Financial Reporting Directive (NFRD), which require listed companies, banks and insurance companies with more than 500 employees to produce non-financial statements. The Commission proposes to enlarge the scope of companies reporting sustainability-related information to cover all large companies as defined by the Accounting Directive and all companies with securities listed on EU-regulated markets except for listed micro-enterprises. The proposed rules aim over time to bring sustainability reporting on an equal footing with financial reporting.
Additional background on amendments to Delegated Acts on investment and insurance advice
Based on the amendments, clients will be given the choice to determine whether and, if so, to what extent, their investments shall be 1) EU taxonomy-compliant; 2) aligned with sustainable investments, as defined by the regulation on sustainability-related disclosures in the financial services sector (SFDR), which also encompass taxonomy-compliant activities; and 3) consider negative externalities of investments on the environment or society (referred to as the so called principal adverse impacts on sustainability).