Finance Watch Statement on New EU Commission Sustainable Finance Package

On 13 June 2023, the European Commission published a new sustainable finance package, including legislative and non-legislative announcements on Environmental, Social and Governance (ESG) ratings, transition finance and the EU Taxonomy. This is the final major sustainable finance announcement expected under the current Commission and builds on the strategy for financing the transition to a sustainable economy, published by the European Commission on 6 July 2021.

Finance Watch, the pan-European NGO advocating to make finance serve society, has reviewed the package and has the following comments:

ESG Ratings

The package contains rules for ESG rating providers, which today are completely unregulated. The proposal aims to establish a governance framework and tackle structural issues, such as the lack of clarity on the ESG ratings due to inconsistent and opaque methodologies.

Finance Watch welcomes the proposed rules for:

  • an authorization and supervision system for ESG rating providers operating in the EU. The text also introduces the possibility for providers to operate from third countries under the proposed rules for equivalence regimes.
  • the prevention and the mitigation of conflicts of interest, which will prohibit ESG rating providers from providing consulting or other services to their clients. The text also includes provisions on governance arrangements, conflicts of interest due to ownership structure and specific restrictions for ESG rating analysts.
  • transparency on the methodology, models and assumptions applied by the rating provider and specific disclosures to the public and rating subscribers.

Finance Watch is particularly happy to see strong transparency provisions in the Commission’s proposal and actions to address prevailing confusion around the contents and objectives of different ESG ratings. The annex of the proposal includes many of the key points outlined in Finance Watch´s recent policy brief “Regulating ESG ratings to strengthen sustainable investors”:

  • ESG ratings agencies will be obliged to clearly disaggregate composite ESG ratings into individual, standalone Key Performance Indicators (KPIs) for environmental, social and governance factors, and disclose the weighting method. Rating agencies must also make it clear what is being assessed – financial risks from ESG factors to a company or a product (financial materiality) or real-world impacts that a company or product have on environment and society (impact materiality).
  • Disclosure requirements will include whether ratings assess absolute or relative (for example, best-in-class) performance of a company or product.

Finance Watch notes that the requirements on conflicts of interest due to ownership structure could be more aligned with the credit rating agencies regulation, to define permissible ownership  thresholds. Finance Watch also recommends that any differences between environmental assessments and the EU Taxonomy be clearly explained to ensure a basic level of consistency.

On ESG ratings, Thierry Philipponnat, chief economist at Finance Watch, said:

“Today’s proposal from the Commission acknowledges that there’s currently a lack of clarity around ESG ratings, and it goes a long way to address this problem. It’s a satisfying proposal – ESG rating agencies will have to make their weighting of E, S and G explicit, they’ll need to say if they’re assessing financial risks or real-world impact and they will need to make it clear whether a rating is made in absolute or relative terms.”

The European Parliament and the Council will now have to determine their respective positions on the legislative proposal.

Transition Finance

The Commission also addressed transition finance, bringing more clarity to how the existing framework can support companies in the sustainable transition. Finance Watch welcomes the recommendations on the use of the EU Taxonomy and companies´ transition plans as transition tools. However, there is a clear need for further work beyond voluntary recommendations for finance to drive positive change in the real world. As stated by Finance Watch in its report “The Problem Lies in the Net: Making Finance contribute to a Net Zero Economy“, the decarbonisation of financial portfolios will not decarbonize the real economy.

Taxonomy

Finally, Finance Watch welcomes the publication of the so-called TAXO4 delegated acts covering the list of economic activities to be considered as taxonomy-aligned for the four remaining environmental objectives. The Commission also put forward updates to the existing climate delegated acts. Both elements will now need to be endorsed by the European Parliament and the Council.

The Taxonomy piece of this package also contains a working document on usability, including an overview of the key pillars of the framework now in place, and adopted measures to enhance its usability

– Ends –

Notes to editors

Background on the European Reporting Sustainability Standards (ESRS)

Today’s sustainable finance package follows the publication of European Reporting Sustainability Standards (ESRS) draft delegated acts for public consultation on 9 June 2023. These delegated acts will bring into law the standards proposed by the European Financial Reporting Advisory Group (EFRAG) for companies subject to the Corporate Sustainability Reporting Directive (CSRD). Finance Watch is concerned by several substantial deviations from EFRAG’s technical proposal in the Commission text published last week, including:

  • all standards and disclosure requirements are subject to materiality assessment with the exception of the “general disclosure” standards. Thus, climate change and social (own workforce) standards are not mandatory anymore.
  • certain disclosures are made voluntary, in particular the biodiversity transition plans and certain social indicators.

On the ESRS, Vincent Vandeloise, senior research & advocacy officer at Finance Watch, said:

“The reduction of mandatory data points is problematic. On the one hand, it’s difficult to believe that climate change could not be material for any company reporting under CSRD. On the other hand, financial institutions are left uncertain about whether the information they need to comply with their own SFDR reporting obligations will be available.”

To arrange an interview with Thierry Philipponnat chief economist at Finance Watch or Vincent Vandeloise, senior research & advocacy officer at Finance Watch, please contact Alison Burns at alison.burns@finance-watch.org or call on +32 (0)471577233

About Finance Watch

Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.

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