EC adopted a package of sustainable finance measures comprising the EU Taxonomy Climate Delegated Act, the proposal for a Corporate Sustainability Reporting Directive or CSRD, and the six amending Delegated Acts on investment and insurance advice, fiduciary duties, and product oversight and governance. Feedback period on the proposal for CSRD ends on June 22, 2021. EC also published sets of questions and answers (Q&As) and a factsheet on this package of measures. The package is aimed to put the European financial sector at the heart of a sustainable and inclusive recovery from the COVID-19 pandemic and the longer-term sustainable development of Europe. These measures are also expected to be instrumental in making Europe climate-neutral by 2050.
EU Taxonomy Climate Delegated Act. The Delegated Act introduces the first set of technical screening criteria to define the activities that contribute substantially to two of the environmental objectives under the Taxonomy Regulation; these objectives are climate change adaptation and climate change mitigation. The screening criteria are based on scientific advice from the Technical Expert Group on sustainable finance. This development follows extensive feedback from stakeholders as well as discussions with the European Parliament and Council. The Delegated Act would cover the economic activities of roughly 40% of the listed companies, in sectors that are responsible for almost 80% of direct greenhouse gas emissions in Europe. The EU Taxonomy Delegated Act is a living document and will continue to evolve over time, in light of developments and technological progress. The Delegated Act will be formally adopted at the end of May and will enter into force at the end of the scrutiny period of co-legislators (four months that can be extended by another two months); it will apply from January 01, 2022.
Proposal on Corporate Sustainability Reporting Directive. The Directive revises and strengthens the existing rules introduced by the Non-Financial Reporting Directive (NFRD). This Directive would extend the sustainability reporting requirements in EU to all large companies and all listed companies. This means that nearly 50,000 companies in EU will need to follow detailed EU sustainability reporting standards, an increase from the 11,000 companies that are subject to the existing requirements. EC proposes the development of separate and proportionate standards for large companies and small and medium enterprises or SMEs, which the non-listed SMEs can use voluntarily. Companies will have to report on how sustainability issues, such as climate change, affect their business and impact their activities. The EU sustainability reporting standards should be a “one-stop-shop,” providing companies with a single solution that meets the information needs of investors and other stakeholders. The next step is for the European Parliament and the member states in the Council to negotiate a final legislative text on the basis of EC proposal. In parallel, European Financial Reporting Advisory Group or EFRAG will start work on a first set of draft sustainability reporting standards and aim to have the first set of draft standards ready by mid-2022. If the Parliament and Council reach agreement in the first half of 2022, then EC should be able to adopt the first set of reporting standards under the new legislation by the end of 2022. That would mean that companies would apply the standards for the first time to reports published in 2024, covering financial year 2023.
Amendments to Delegated Acts on investment and insurance advice, fiduciary duties, and product oversight and governance. As part of this package, EC also adopted six amending Delegated Acts to ensure that financial firms, such as advisers, asset managers, and insurers, include sustainability in their procedures and their investment advice to clients. Under the existing rules, advisers obtain information about a client's investment knowledge and experience, financial situation, ability to bear losses, investment objectives, and risk tolerance (suitability assessment). With the amendments to Delegated Acts, advisers will also have to obtain information about the sustainability preferences of clients. The amendments clarify the obligations for financial firms when assessing their sustainability risks, such as the sustainability of their business models. Amendments also include a clarification of rules on investment and insurance product oversight and governance to enable consideration of sustainability factors in product design. The amendments to the Delegated Acts will be scrutinized by the European Parliament and the Council (three month periods and extendable once by three additional months) and are expected to apply as of October 2022.
- Press Release
- Sustainable Finance Package
- CSRD Proposal and Related Documents
- Q&A on Delegated Acts
- Q&A on CSRD Proposal
Comment Due Date: June 22, 2021 (CSRD Proposal)
Keywords: Europe, EU, Banking, Insurance, Securities, Sustainable Finance, Climate Change Risk, ESG, NFRD, CSRD, Sustainability Reporting, Taxonomy Regulation, EC
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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