EU Council Adopts Legislative Reforms Under Capital Markets Union

With respect to sustainable finance, the first reform introduces disclosure obligations on how financial companies integrate environmental, social, and governance factors in their investment decisions. The second reform creates new types of benchmarks aimed at giving greater information on an investment portfolio's carbon footprint: the EU climate transition benchmarks, which aim to lower the carbon footprint of a standard investment portfolio, and the EU Paris-aligned benchmarks, which have the more ambitious goal to select only components that contribute to attaining the 2°C reduction set out in the Paris climate agreement.

Another package of measures that was adopted sets out new prudential requirements and supervisory arrangements for investment firms. The reform adapts the requirements to the firms' risk profiles and business models while preserving financial stability. The largest firms that are considered systemic will be subject to the full banking prudential regime and will be supervised as credit institutions, while smaller firms will enjoy a new bespoke regime with dedicated prudential requirements.

The Council also adopted a set of new rules on harmonized product requirements and supervision of covered bonds, to ensure a high level of investor protection. This framework specifies a common definition for receiving an EU covered bond label and benefit from preferential capital treatment. Harmonized regulatory framework would provide a stable funding source for credit institutions, which would be better placed to provide affordable mortgages for consumers and businesses and would make alternative safer investments available to investors. Covered bonds are financial instruments issued by a credit institution and backed by a separate pool of assets—typically mortgages or public debt—to which investors have a preferential claim in case of failure of the issuer. 

The Council adopted a new SME framework to help small and medium businesses access new sources of funding. This specifically concerns access to "SME growth markets," a recently introduced category of trading venue dedicated to small issuers. The proposal contains amendments to the market abuse and the prospectus regulations, which make the obligations placed on SME growth market issuers more proportionate while preserving market integrity and investor protection.

Related Link: Press Release and Adopted Texts

Keywords: Europe, EU, Banking, Securities, Capital Markets Union, Sustainable Finance, ESG, Climate Benchmarks, Covered Bonds, Prudential Framework for Investment Firms, SME, Climate Change Risk, Proportionality, European Council