EU Sustainable Finance Update: The April 2021 Package
This April’s Earth week marked a milestone in the implementation roadmap of the European Union’s Green Deal. In addition to the provisional agreement reached regarding the EU’s Climate Law that enshrines the EU’s commitment to reaching climate neutrality by 2050, the European Commission unveiled a range of legislative updates and proposals around sustainable finance regulation that would be crucial in turning the EU’s decarbonisation objectives into reality. A summary of the key developments is provided below:
- EU Taxonomy Update
On 21 April 2021, EU legislators published the long-awaited EU Taxonomy delegated acts, featuring an updated list of technical screening criteria that would help determine alignment with the EU’s climate change mitigation and adaptation objectives. The taxonomy rulebook introduces a labelling system for company and portfolio activities that could direct hundreds of billions in funds to industries and companies that receive a “sustainable” label for all or part of their activities. According to the European Commission, the Taxonomy currently covers 13 sectors, including renewable energy, transport, forestry, manufacturing, buildings, insurance and even the arts, which together account for nearly 80% of EU greenhouse gas emissions. A decision on whether to incorporate natural gas and nuclear energy, the two most controversial aspects of the taxonomy, was delayed and will be dealt with separately later this year.
- A new dawn for corporate sustainability reporting: CSRD
The EU also introduced a proposal for overhauling the Non-Financial Reporting Directive (NFRD), to be superseded by a new Corporate Sustainability Reporting Directive (CSRD). According to the proposal, nearly 50,000 companies in the EU will become subject to detailed EU sustainability reporting standards, an increase from the 11,000 companies that fall under the current requirements. Moreover, the EU Commission has proposed the development of standards for large companies and separate, proportionate standards for SMEs, which non-listed SMEs can use voluntarily. Another game-changer in the new proposal means that the CSRD would most likely require all such companies to seek assurance for reported non-financial information. The new Directive aims to ensure alignment with other EU initiatives on sustainable finance, in particular the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation. The objective of regulators is to reduce complexity and the potential for duplicative reporting requirements, which is commendable. The CSRD update still needs to pass through the EU’s cumbersome legislative process and it is expected that companies would apply the standards for the first time to reports published in 2024, covering financial year 2023.
- Six Delegated Acts on fiduciary duties, investment, and insurance advice
The additional proposed updates affecting UCITS, AIFMs and MiFID firms aim to ensure that financial companies (e.g., advisers, asset managers, or insurers) include sustainability in their processes and investment advice to clients. The European Commission intends that these six delegated acts will empower retail investors to decide where and how their savings should be invested and increase the demand for financial instruments and products with sustainable investment strategies and those that consider adverse impact on sustainability. The updates are expected to apply from October 2022.