Sustainable finance - what's new?

On 10 February 2022, ESMA published its Sustainable Finance Roadmap 2022-2024, with priorities and actions for the next three years. The priority areas have been identified to address a number of key challenges such as the rapid - and sometimes inconsistent - evolution of the regulatory framework (as we have experienced over the last 18 months), the diversity of interpretation and application of legislation, the growing demand for ESG investments, and the increasing risk of misalignment between investors' sustainability preferences and the products offered to them.

ESMA stresses that “in general, a complete, clear and consistent set of rules and supervisory and enforcement powers is a precondition for effective supervision and enforcement at national level and for supervisory convergence at EU level (…)". A message ABBL has repeatedly highlighted to key decision makers. The sequencing of existing legislations could question whether this precondition is met today or not.

ESMA’s action plan is driven by three main objectives:

1. Tackling greenwashing and promoting transparency
2. Building NCAs’ and ESMA capacities
3. Monitoring, assessing and analysing ESG markets and risks.

With regards to greenwashing, ESMA underlines that investor education plays an important role when explaining which product would match certain clients’ ESG preferences.

ESMA also acknowledges that EU investors and supervisors will have to cope with the current shortcomings in the field of ESG data and sustainability reporting – be it incorrect, missing, limited or not harmonised – for some years to come, until the legislative proposal for a Corporate Sustainability Reporting Directive (CSRD) kick in for the 2024 reporting period.

A shared understanding of key concepts among National Competent Authorities (NCAs), further guidance to the market on how to apply the various rules, better understanding of data issues and the interaction between digital innovation and sustainability as well as the coordination and convergence with international initiatives are some of the key actions identified to address the above-mentioned challenges.

As part of its contribution to the European Commission’s work on MiFID II, ESMA has published a consultation on certain aspects of the MiFID II suitability requirements. The latter will be discussed in the relevant ABBL working groups and a common response will be submitted.

On 18 February 2022, the Council of the EU agreed on a common approach on the European Commission (EC) proposal for a corporate sustainability reporting directive (CSRD) as part of the European sustainable finance strategy. The proposal revises the non-financial reporting directive from 2014 and will ensure the robustness of companies’ commitments by introducing new features. The European Parliament is still discussing amendments to the proposal and is expected to come to a conclusion in the next few weeks. At this stage we are expecting a final text by the end of the year. As far as the date of application the discussions are still going on.

The ABBL Corporate Sustainability working group is actively contributing to the discussions held at Member States level and with the European Banking Federation to ensure consistency with other pieces of regulation (Disclosure Regulation, ESG risks disclosures under Pillar 3, etc.) and the practical application of the future new EU sustainability reporting standards.

The European Commission has adopted a proposal for a Directive on corporate sustainability due diligence on 23 February 2022. The proposal aims to foster sustainable and responsible corporate behaviour throughout global value chains. It also aims to achieve a fair and sustainable economy by laying down rules for companies to respect human rights and environment in their activities.

The initiative focuses on the due-diligence duties of a company and its impact on:

• human rights including workers’ rights
• health
• the climate
• the environment

Its aim is to prevent, mitigate and account for potentially adverse sustainability impact on existing international principles and guidelines.

Companies will have to identify risks – both upstream and downstream – and act on these risks, especially with regards to information on due-diligence processes that are at the heart of the this initiative.

The proposal has been presented to the European Parliament and the Council for approval, and once it is adopted, Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the EC.

On 28 February 2022, the EU Platform on Sustainable Finance has launched a report on Social Taxonomy. In the report, the Platform on Sustainable Finance proposes a structure for a social taxonomy which is aligned with the Taxonomy Regulation, and aims to address three objectives:

• providing decent work (including value chain workers)
• adequate living standards and wellbeing for end users
• inclusive and sustainable communities and societies

The Platform will now:

• clarify the minimum safeguards
• conduct a study on the impacts of a social taxonomy
• prioritise objectives and sub-objectives
• define substantial-contribution and Do Not Significant Harmful criteria for the first objective(s) and sectors

The ABBL taxonomy and labels WG will closely monitor the next steps.

As we write this article, the European Institutions are still working on a number of delegated acts to already adopted legislations. As such, the European Parliament and the Council are examining the taxonomy delegated acts including the very political question of nuclear and gas, whilst the European Commission is finalising SFDR level 2 measures expected to be published early next month.

By Julien Froumouth, Adviser - Sustainable Finance, and Aurélie Cassou, Senior Adviser - European Affairs