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Sustainable finance
European Union Carbon Market Glossary

 

The EU framework for a sustainable finance consists of three main legislative pieces:

1. Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment (COM (2018) 353 final - Taxonomy Regulation),


2. Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (Disclosure Regulation),

3. Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks (Benchmarks Regulation).

 


Taxonomy Regulation

 

 

The Taxonomy Regulation introduces a EU-wide classification system, or "taxonomy", which will provide businesses and investors with a common scheme to identify what economic activities can be considered environmentally sustainable.

 

As the Council of the EU underlines, the taxonomy will enable investors to re-orient their investments towards more sustainable technologies and businesses.

 

It will be instrumental for the EU to become climate neutral by 2050 and achieve the Paris agreement's 2030 targets.

 

These include a 40% cut in greenhouse gas emissions for which the Commission estimates that the EU has to fill an investment gap of about 180 billion EUR per year.

 

Before the Regulation, there was no common classification system at EU or global level which defined environmentally sustainable economic activity.

 

The framework is based on six EU environmental objectives:
1. climate change mitigation;
2. climate change adaptation;
3. sustainable use and protection of water and marine resources;
4. transition to a circular economy;
5. pollution prevention and control; and
6. protection and restauration of biodiversity and ecosystems.

 

In order to qualify as environmentally sustainable, economic activities will have to fulfil the following requirements:
1. contribute substantively to at least one of the six environmental objectives listed above;
2. not significantly harm any of the environmental objectives;
3. be carried out in compliance with minimum social safeguards;
4. comply with specific ‘technical screening criteria’.

 

Investment in coal will not be considered environmentally sustainable.

 

The agreement retains the concept of maintaining a neutral stance in relation to different energy forms, provided that they are low in greenhouse gas emissions.

 

The taxonomy will also include two sub-categories of "enabling" and "transitional" activities.

 

There will be an obligation to disclose for each financial product the proportion invested in those enabling and transitional activities.

 

The taxonomy for climate change mitigation and climate change adaptation should be established by the end of 2020, in order to ensure its full application by end of 2021.

 

For the four other objectives, the taxonomy should be established by the end of 2021 for an application by the end of 2022.

 

 

Disclosure Regulation

 

 

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (Disclosure Regulation) introduces consistency and clarity on how institutional investors, such as asset managers, insurance companies, pension funds, or investment advisors should integrate environmental, social and governance (ESG) factors in their investment decision-making process.

 

Exact requirements will be further specified through delegated acts, which will be adopted by the European Commission at a later stage.

 

In addition, those asset managers and institutional investors would have to demonstrate how their investments are aligned with ESG objectives and disclose how they comply with these duties.

 

According to Article 20, Regulation shall apply from 10 March 2021 (with the exception of some of its provisions, which shall apply from 29 December 2019 and from 1 January 2022).

 

 

 

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector, Recitals 12 - 18


 
12) This Regulation maintains the requirements for financial market participants and financial advisers to act in the best interest of end investors, including but not limited to, the requirement of conducting adequate due diligence prior to making investments, provided for in Directives 2009/65/EC, 2009/138/EC, 2011/61/EU, 2013/36/EU, 2014/65/EU, (EU) 2016/97, (EU) 2016/2341, and Regulations (EU) No 345/2013 and (EU) No 346/2013, as well as in national law governing personal and individual pension products. In order to comply with their duties under those rules, financial market participants and financial advisers should integrate in their processes, including in their due diligence processes, and should assess on a continuous basis not only all relevant financial risks but also including all relevant sustainability risks that might have a relevant material negative impact on the financial return of an investment or advice. Therefore, financial market participants and financial advisers should specify in their policies how they integrate those risks and publish those policies.


(13) This Regulation requires financial market participants and financial advisers which provide investment advice or insurance advice with regard to insurance‐based investment products (IBIPs), regardless of the design of the financial product and the target market, to publish written policies on the integration of sustainability risks and ensure the transparency of such integration.


(14) A sustainability risk means an environmental, social or governance event or condition that, if it occurs, could cause a negative material impact on the value of the investment, as specified in sectoral legislation, in particular in Directives 2009/65/EC, 2009/138/EC, 2011/61/EU, 2013/36/EU, 2014/65/EU, (EU) 2016/97, (EU) 2016/2341, or delegated acts and regulatory technical standards adopted pursuant to them.


(15) This Regulation should be without prejudice to the rules on the risk integration under Directives 2009/65/EC, 2009/138/EC, 2011/61/EU, 2013/36/EU, (EU) 2016/97, (EU) 2016/2341, and Regulations (EU) No 345/2013 and (EU) No 346/2013 and as well as under national law governing personal and individual pension products, including but not limited to the relevant applicable proportionality criteria such as size, internal organisation and the nature, scope and complexity of the activities in question. This Regulation seeks to achieve more transparency regarding how financial market participants and financial advisers integrate sustainability risks into their investment decisions and investment or insurance advice. Where the sustainability risk assessment leads to the conclusion that there are no sustainability risks deemed to be relevant to the financial product, the reasons therefor should be explained. Where the assessment leads to the conclusion that those risks are relevant, the extent to which those sustainability risks might impact the performance of the financial product should be disclosed either in qualitative or quantitative terms. The sustainability risk assessments and related pre‐contractual disclosures by financial market participants should feed into pre‐contractual disclosures by financial advisers. Financial advisers should disclose how they take sustainability risks into account in the selection process of the financial product that is presented to the end investors before providing the advice, regardless of the sustainability preferences of the end investors. This should be without prejudice to the application of provisions of national law transposing Directives 2014/65/EU and (EU) 2016/97, in particular the obligations on financial market participants and financial advisers as regards product governance, assessments of suitability and appropriateness, and the demands‐and‐needs test.


(16) Investment decisions and advice might cause, contribute to or be directly linked to effects on sustainability factors that are negative, material or likely to be material.


(17) To ensure the coherent and consistent application of this Regulation, it is necessary to lay down a harmonised definition of ‘sustainable investment’ which provides that the investee companies follow good governance practices and the precautionary principle of ‘do no significant harm’ is ensured, so that neither the environmental nor the social objective is significantly harmed.


(18) Where financial market participants, taking due account of their size, the nature and scale of their activities and the types of financial products they make available, consider principal adverse impacts, whether material or likely to be material, of investment decisions on sustainability factors, they should integrate in their processes, including in their due diligence processes, the procedures for considering the principal adverse impacts alongside the relevant financial risks and relevant sustainability risks. The information on such procedures might describe how financial market participants discharge their sustainability‐related stewardship responsibilities or other shareholder engagements. Financial market participants should include on their websites information on those procedures and descriptions of the principal adverse impacts. In that respect, the Joint Committee of the European Banking Authority established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council (15) (EBA), the European Insurance and Occupational Pensions Authority established by Regulation (EU) No 1094/2010 of the European Parliament and of the Council (16) (EIOPA) and the European Securities and Markets Authority established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council (17) (ESMA) (the ‘Joint Committee’), and financial market participants and financial advisers should consider the due diligence guidance for responsible business conduct developed by the Organisation for Economic Co‐operation and Development (OECD) and the United Nations‐supported Principles for Responsible Investment.

 

 

 

 

 

 

 

chronicle

Sustainable finance - regulatory chronicle

  

 

 

 

6 February 2020

 

ESMA Strategy on Sustainable Finance, ESMA22-105-1052

 

18 December 2019


Council of the EU Press release, Sustainable finance: EU reaches political agreement on a unified EU classification system

 

17 December 2019

 

Proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment (COM (2018) 353 final)

 

17 November 2019

 

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector

 

Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks 

 

23 October 2019

 

Regulation of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector, 2018/0179 (COD), PE-CONS 87/19

 

24 May 2018 

 

European Commission Press release, Sustainable finance: Making the financial sector a powerful actor in fighting climate change

 

Frequently asked questions: Commission proposals on financing sustainable growth

 

 

 

 

 

IMG 0744

    Documentation    

 

 

 

 

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector

 

Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks 

 

 

 

 

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    Links    

 

 

 

 

 

Paris Agreement

 

Technical expert group on sustainable finance (TEG)



 

 

 

 

 

 

 

 

Last Updated on Saturday, 08 February 2020 18:00
 

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