Sustainable Finance Infographic
Supporting Transition Efforts
The European Commission (EC) will consider options to extend the EU Taxonomy framework to possibly recognize economic activities that perform at an intermediate level, thereby aiming to foster transparency and mobilize finance for economic activities that are on a credible path towards sustainability. The Platform on Sustainable Finance published a final report encompassing their advice to the EC on an extended taxonomy to support economic transition (based on this draft report and a public consultation) in March 2022. The EC will publish a report as required by Article 26(2) of the Taxonomy Regulation (Regulation (EU) 2020/852), describing the provisions needed to cover economic activities with no significant impact on environmental sustainability and significantly harmful economic activities.
General Framework & Other Labels
The European Commission (EC) will work together with the European Supervisory Authorities (ESAs) and the Platform on Sustainable Finance (PSF) to assess the needs and merits of a general framework for labels for financial instruments (by 2023). The EC will further work on other bond labels such as a transition or sustainability-linked bond in cooperation with ESAs and PSF. For financial products that fall under Article 8 of the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088), the EC will propose introducing minimum sustainability criteria to ensure minimum sustainability performance to further strengthen a harmonized application of the Regulation.
EU Taxonomy Complementary Climate Delegated Act
The first delegated act on sustainable activities for climate change adaptation and mitigation objectives (Climate Delegated Act), and had been published in the Official Journal on 9 December 2021 and has been applicable since January 2022. However, certain sectors and activities were left out. Hence, the EC adopted a Complementary Climate Delegated Act covering nuclear and gas energy activities; and has been applicable since January 2023.
EU Taxonomy Environmental Delegated Act
The Technical Working Group (Subgroup 1) of the Platform on Sustainable Finance published their final report including an Annex with the technical screening criteria for the four remaining environmental objectives laid out in points c) to f) of Article 9 of the Taxonomy Regulation (Regulation (EU) 2020/852) in March 2022. In November 2022, the Platform published a report with supplementary advice on methodology and technical screening criteria for the climate and environmental objectives. In April 2023, the European Commission (EC) published a Draft Delegated Act containing a new set of EU taxonomy criteria for the four remaining objectives and is expected to adopt these Delegated Acts in June 2023. Next to that, the EC has also proposed amendments to the Taxonomy Climate Delegated Act (Delegated Regulation (EU) 2021/2139) and to the Taxonomy Disclosures Delegated Act (Delegated Regulation (EU) 2021/2178).
As required by the Benchmark Regulation (Regulation (EU) 2016/1011), the European Commission (EC) will assess the possibilities of establishing an ESG Benchmark. This assessment will be supported by a recently published study on the feasibility, minimum standards and transparency requirements of an EU ESG Benchmark label, setting out possible approaches for the creation of minimum standards for an EU ESG Benchmark. Furthermore, the EC will review the minimum standards of EU Climate Transition and Paris-aligned Benchmarks (Regulation (EU) 2019/2089), to ensure coherence with the EU Taxonomy.
Within the framework of the Prospectus Regulation framework (Regulation (EU) 2017/1129), the Commission will introduce targeted prospectus disclosures for green, social and sustainable securities to enhance the comparability, transparency and harmonization of information provided for such instruments and to help fight greenwashing.
Supporting Credible Social Investments
To support credible social investments, the European Commission (EC) will engage with the European Supervisory Authorities (ESAs) to further improve the Regulatory Technical Standards under the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088) to clarify indicators for ESG-related principal adverse impacts. Additionally, the EC will publish a report on the provisions required for a possible Social Taxonomy as prescribed by Article 26(2) of the Taxonomy Regulation (Regulation (EU) 2020/852).
The European Commission (EC) will integrate sustainable finance-related data in the data spaces under the European Strategy for data. Together with the Digital Finance Platform, the EC will further reflect on possible additional actions to facilitate and encourage innovative solutions utilizing digital technologies to support SMEs and retail investors.
Natural Disaster Dashboard & Climate Resilience Dialogue
The European Commission (EC) had asked the European Insurance and Occupational Pensions Authority (EIOPA) to further develop the pilot dashboard to identify insurance coverage gaps for natural catastrophes. In December 2022, EIOPA published its dashboard on the insurance protection gap for natural catastrophes. The dashboard enables evidence-based decision-making on measures to improve society’s resilience against natural catastrophes.
In November 2022, the EC has also launched a Climate Resilience Dialogue with all relevant stakeholders to narrow the climate protection gap. The primary task of the Climate Resilience Dialogue is to exchange views on how to address the losses incurred from climate-related disasters and to identify how the insurance industry can contribute more to climate adaptation.
Review of Mortgage Credit Directive
The European Commission (EC) will explore possibilities to support the uptake of energy efficient mortgages as part of the review of the Mortgage Credit Directive (Directive 2014/17/EU). To that end, the EC had sent a Call for Advice (CfA) to the European Banking Authority (EBA) regarding the review of this directive in December 2021. In response to this CfA, EBA published its Opinion and Report in June 2022 and suggests establishing an EU-wide definition of ‘green mortgages’ to encourage sustainable lending and borrowing. Additionally (i.a.), adequate public disclosure requirements to increase transparency and mitigate the risk of green washing should be developed.
Corporate Sustainability Due Diligence
The European Commission proposed a Directive on Corporate Sustainability Due Diligence (CSDDD) in February 2022. The initiative was initially known as “sustainable corporate governance”. This proposal establishes a corporate sustainability due diligence duty to address negative human rights and environmental impacts. The proposal aims to foster sustainable and responsible corporate behavior throughout global value chains. Companies will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights and on the environment. The co-legislators (Parliament and Council) are expected to start their negotiations on the final text of the CSDDD in May/June 2023 (agreement expected late 2023/early 2024).
Access for SMEs and Citizens
In November 2022, the European Commission (EC) requested the European Banking Authority’s (EBA) opinion on the definition and possible supporting tools for green retail loans and green mortgages to encourage green retail lending. To that end, the EBA will consider the merits of an EU definition for green loans and mortgages and will identify potential measures to encourage their uptake or facilitate their access by retail and SME borrowers. EBA will deliver its advice to the EC by December 2023.
The EC will also offer technical support to Member States to facilitate the access of SMEs to sustainable finance advisory services and to gain easy access to sustainable financing (through its Technical Support Instrument under Regulation (EU) 2021/240) by 2023. In line with the Corporate Sustainability Reporting Directive, the European Financial Reporting Advisory Group will prepare a simplified voluntary sustainability reporting standard to allow SMEs to report on sustainability risks and impacts and thereby increase their visibility to investors.
Financial Literacy & Investment Advice
Within the framework of the Capital Markets Union Action Plan, the European Commission (EC) integrated Sustainable Finance aspects in the joint EU/OECD-INFE financial competence framework for individuals in January 2022. In line with this Action Plan and subject to further assessment, the EC will seek ways on how to improve and strengthen financial advisors’ expertise and qualification in sustainability.
ESG Risks in Credit Ratings
The European Commission (EC) had asked the European Securities and Markets Authority to share its assessment of the effectiveness of the updated guidelines aimed at improving the disclosure of information on how ESG factors are considered in credit ratings and outlooks. ESMA published their article in February 2022 and found that the overall level of disclosures has increased since the introduction of the Guidelines. However, there was still a high level of divergence in the disclosure of ESG factors in credit ratings.
In April 2022, the EC launched a targeted consultation to gain a better insight on the functioning of the market for ESG ratings and to understand how credit rating agencies incorporate ESG risks in their creditworthiness assessment. A large majority of respondents stated that it is important to understand to what extent individual credit rating actions have been influenced by sustainability factors. These findings will be reflected accordingly in the preparation of any further Commission initiative in this regard.
Managing Systemic Sustainability Risks
In collaboration with the European Supervisors and the European Central Bank (ECB), the European Commission (EC) aims to capture, monitor, and mitigate all systemic sustainability risks impacting long-term financial stability. To advance efforts in measuring the financial risks stemming from a significant loss of biodiversity and ecosystem degradation, the EC will prepare a report on the measurement and presence of such risks in the EU.
Further, the EC submitted a formal request in March 2023 for a one-off scenario analysis exercise to be conducted jointly by the European Supervisory Authority (ESAs), the ECB and the European Systemic Risk Board (ESRB) to assess the resilience of the EU’s financial system on the way to the EU’s targets for 2030, going beyond the usual climate stress tests, as a cross-sectoral exercise looking also at contagion and second-round effects. The EC requested to receive the results no later than Q1 2025.
Also, with input from the ESRB, ECB and the European Banking Authority, the EC will assess whether the current macro-prudential toolkit is suitable to address climate-change-related financial stability risks and it will consider a legislative proposal as part of an upcoming review of the banking macro-prudential framework.
Review of CRR/CRD
As part of the revision of the CRR/CRD (Capital Requirements Regulation (Regulation (EU) No 575/2013) and Capital Requirements Directive (Directive 2013/36/EU)), the European Commission (EC) has proposed amendments to the prudential framework for banks to ensure that banks systematically identify, disclose, and manage sustainability risks (environmental, social and governance risks) as part of their risk management (find more information here). The EC envisages the introduction of new mandates for the European Banking Authority (EBA). EBA plans to review its Guidelines on institutions’ stress testing to provide guidance for institutions on how to test their resilience to climate change, but also to long-term negative impacts of ESG factors.
Review of Solvency II Directive
In September 2021, the European Commission adopted a proposal of amendments to the Solvency II Directive (Directive 2009/138/EC). This comprehensive review package of Solvency II rules aims at strengthening the contribution of European insurers to the financing of the recovery, the progression of the Capital Markets Union and the channeling of funds toward the European Green Deal. The proposal includes a new obligation for insurers to conduct climate scenario analyses. At a later stage, the EC may consider extending this requirement to other environmental risks. The EC also mandated the European Insurance and Occupational Pensions Authority (EIOPA) to assess whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental or social objectives would be justified. EIOPA published its discussion paper on the Prudential Treatment of Sustainability Risks in December 2022. EIOPA shall submit a report on its findings to the Commission by June 2023.
Sustainability Risks in Financial Reporting
The European Commission (EC) will work together with the European Financial Reporting Advisory Group, the European Securities and Markets Authority, and International Accounting Standards Board to assess how financial reporting standards can include relevant sustainability risks. The EC will also work and engage with the industry on biodiversity and natural capital accounting to encourage the development of standards for assessing natural capital.
Reliable & Transparent ESG Ratings
In June 2022, the European Securities and Markets Authority (ESMA) published a letter to the European Commission (EC) outlining its findings from a Call for Evidence to gather information on the market structure for ESG rating providers in the European Union. The feedback received by ESMA is indicative of an immature but growing market which, following several years of consolidation, has seen the emergence of a small number of large non-EU headquartered providers.
In August 2022, the EC published the summary report of their targeted consultation aimed at gaining a better insight into the functioning of the market for ESG ratings. Almost all respondents stated that an intervention in the ESG ratings market is necessary, of which the large majority support a legislative intervention. The EC is currently working on a regulation on ESG ratings and is expected to publish its proposal in June 2023 (mentioned in possible items for College agendas).
Review of IORP II Directive
The European Commission (EC) asked the European Insurance and Occupational Pensions Authority (EIOPA) ahead of the review of the IORP II Directive (Directive (EU) 2016/2341) to analyze the current pension framework, in particular, to assess the potential need to broaden the concept of ‘long-term best interest of members and beneficiaries’ and introduce the concept of double materiality, considering members’ and beneficiaries’ sustainability preferences and broader societal and environmental goals. In March 2023, EIOPA has launched a public consultation on its draft technical advice to the EC on the upcoming review of the IORP II Directive. The advice is given in response to a call for advice from the EC. EIOPA will provide its final advice in October 2023.
Building on the changes in fiduciary duty rules that were introduced in the six amending delegated acts in April 2021 and in collaboration with the European Supervisory Authorities, the EC will contemplate the benefits of further changes to enable financial market participants and advisers to systematically consider positive and negative sustainability impacts of their products and investment decisions, including for UCITS, MIFID II, AIFMD, and IDD entities. Such review would develop alongside the potential review of fiduciary duties through IORP II.
Review of SRD II
The Shareholder Rights Directive (SRD II) (Directive (EU) 2017/828) sets out a minimum baseline for stewardship activities, effective stewardship, and long-term decision making. In the upcoming review in 2023, the European Commission will examine how the SRD II may better reflect EU sustainability goals and align with global best practices in stewardship guidelines.
Disclosure of Sustainability Targets
The European Commission (EC) will reinforce the disclosure and monitoring of the financial sector’s commitment to sustainability. With the Corporate Sustainability Reporting Directive and the development of Sustainability Reporting Standards by the European Financial Reporting Advisory Group, financial institutions will be required to disclose their transition and decarbonization plans. With the Regulatory Technical Standards under the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088), the EC aims at enhancing the disclosure and effectiveness of decarbonization action for all financial products. The EC further welcomes voluntary pledges by financial institutions globally to adopt strategic science-based climate and sustainability targets and will examine how more guidance could ensure the credibility of such voluntary pledges.
Monitor & Measure Capital Flows
Together with the Platform on Sustainable Finance (Subgroup 3), the European Commission (EC) will develop a robust monitoring framework and a set of indicators to measure capital flows into sustainable investments to assess the alignment of the EU’s financial sector. The EC will further assist the Member States to identify the investment gaps and measure the progress made by their financial sector and ask the Member States to prepare an assessment of their financial markets’ alignment with the EU climate and environmental goals (by June 2023). The EC will conduct a detailed long-term investment needs and gap analysis (by Q1 2023) and will also present a consolidated report on the transition of the EU’s financial market and assess the impact of the EU Sustainable Finance Agenda by the end of 2023.
Enable Supervisors to address Greenwashing
The European Commission (EC) has established several Sustainable Finance policies (disclosure requirements & transparency tools) to prevent greenwashing. Supervisors with their legal mandates and powers have a key role in monitoring compliance with Sustainable Finance regulation and protecting consumers and investors against unsubstantiated sustainability claims. The EC will cooperate with the European Supervisory Authorities and assess whether supervisory powers, capabilities, and obligations are fit for purpose to effectively fight greenwashing.
Full Integration of Double Materiality in the Financial System
The European Commission will enhance its collaboration with the European Central Bank (ECB), the European Systemic Risk Board (ESRB), the European Supervisory Authority (ESAs), and the European Environment Agency (EEA) to develop a common methodological base and to consistently and coherently integrate the double materiality perspective across the financial system of the EU. This collaboration should help define intermediate targets for the financial sector, measuring the progress, and thereby facilitating collaborative policy action by all relevant authorities. This cooperation could thus lead to recommending policy measures, tools, and methodologies to implement forward-looking alignment strategies and to address financial stability risks.
Sustainable Finance Research
The European Commission (EC) has established a Sustainable Finance Research Forum to strengthen the role of science and provide an open platform to discuss approaches and experiences with the financial sector’s community. The forum will increase awareness on the use of sustainable finance research and unleash the potential of sustainability-related data, provide tools to help investors navigate challenges in sustainable finance and foster knowledge exchange between researchers and the financial community.
Ambitious International Initiatives & Standards
The European Commission (EC) will promote an ambitious consensus in international forums in the development of international Sustainable Finance initiatives and standards. The EC will particularly advocate for mainstreaming the notion of double materiality and agreeing on common objectives and principles for taxonomies. Additionally, the EC will promote the development of robust international governance on Sustainable Finance and propose expanding the mandate of the Financial Stability Board to integrate the double materiality concept.
Common Ground Taxonomy & Advancing the Work of IPSF
The International Platform on Sustainable Finance (IPSF) published a so-called Common Ground Taxonomy setting out the common features in taxonomies in November 2021. The IPSF said in its first annual report that the “… Common Ground Taxonomy will enhance transparency about what is commonly green in member jurisdictions and contribute to scale up cross-border green investments significantly”. In November 2022, the IPSF published a report on transition finance. Read more about the activities of the IPSF in their 2022 annual report.
Scaling up Sustainable Finance in Partner Countries
The European Commission (EC) will develop a comprehensive strategy to support low- and middle-income countries in expanding their access to Sustainable Finance. To identify challenges and opportunities of Sustainable Finance in the EU’s partner countries, the EC will create a high-level expert group, which will also provide recommendations to the EC on how to speed up private financial flows to implement the external dimension of the Green Deal. The EC will further promote sustainability-related financial instruments and help build back better globally, via the Neighbourhood, Development and International Cooperation Instrument (NDICI) ‘Global Europe’ and the Instrument for Pre-Accession Assistance (IPA).