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 (by 2022). 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
A first delegated act on sustainable activities for climate change adaptation and mitigation objectives (Climate Delegated Act) was published in the Official Journal on 9 December 2021 and is applicable since January 2022. However, certain sectors and activities were left out. Hence, the EC will adopt a Complementary Climate Delegated Act covering new sectors including agriculture and certain energy activities in line with the requirements of the Taxonomy Regulation (Regulation (EU) 2020/852). This Delegated Act will further cover nuclear energy activities, subject to and consistent with the specific expert review process. This Delegated Act will also cover natural gas and related technologies as transitional activities as far as they are within the limits of Article 10(2) of the Taxonomy Regulation. The European Commission has formally adopted in principle this Complementary Climate Delegated Act including nuclear and gas energy activities.
EU Taxonomy Environmental Delegated Act
The Technical Working Group (Subgroup 1) of the Platform on Sustainable Finance is currently developing the technical screening criteria for the four remaining environmental objectives laid out in points c) to f) of Article 9 of the Taxonomy Regulation and has published their final report including an Annex with the technical screening criteria in March 2022. These technical screening criteria will be established through Delegated Acts by the European Commission and will be adopted in 2022.
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 study on existing ESG-related Benchmarks with their best practices and shortcomings. 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 by December 2022.
The European Commission will introduce targeted prospectus disclosures for green, social, and sustainable securities as part of the Prospectus Regulation framework (Regulation (EU) 2017/1129) over the course of 2022. This will create minimum requirements for the comparability, transparency, and harmonization of information available for all ESG securities and will help to 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 (before December 2022). 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) will ask European Insurance and Occupational Pensions Authority to further develop the natural disaster dashboard to identify insurance coverage gaps for natural catastrophes (by mid-2022). By 2022, the EC will also launch a Climate Resilience Dialogue with all relevant stakeholders to exchange best practices and identify ways to address the climate protection gap and increase climate resilience by recommendations or voluntary commitments.
Review of Mortgage Credit Directive
The European Commission 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) by the end of 2022.
Sustainable Corporate Governance
The European Commission will propose a Directive on Sustainable Corporate Governance in Q4 2021 to ensure that companies manage their sustainability risks but also benefit from the opportunities that arise from a sustainable transition. Key aspect would be an EU regulatory framework on company law and corporate governance, enabling companies to focus on long-term sustainable value creation. This directive would assist companies to better manage sustainability risks in their operations and value chains regarding human rights, climate change, and the environment.
Access for SMEs and Citizens
The European Commission (EC) will ask the European Banking Authority for advice on the definition and possible supporting tools for green retail loans and mortgages to encourage green retail lending (Q2 2022). 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 proposal for a 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 towards 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) will ask the European Securities and Markets Authority to share its assessment on the effectiveness of the updated guidelines aimed at improving disclosure of information on how ESG factors are considered in credit ratings and outlooks (Q3 2021), and its findings on how credit rating agencies integrate ESG factors in their methodologies (Q2 2022). Based on these findings, the EC will take action to ensure that credit ratings systematically capture relevant ESG risks in a transparent manner (by Q1 2023).
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. The EC will provide a report on sustainability risks to financial stability by the end of 2023 and develop a report to present a methodological framework and assess the potential financial risks linked with biodiversity loss and environmental degradation by 2022. The EC will also mandate the European Supervisory Authority (ESAs) and ask the ECB to perform regular climate change stress tests or scenario analyses and additionally to conduct a one-off climate change stress test to assess the resilience of the financial sector in line with the Fit-for-55 package. The EC will analyze how risks identified by stress tests or scenario analysis can be integrated into micro- and macro-prudential regulation and supervision. With the support of the ESAs, the European Systemic Risk Board, and the ECB, the EC will evaluate whether the macro-prudential toolkit is fit to address climate-change-related financial stability risks and will further contemplate a legislative proposal as part of an upcoming review of the banking macro-prudential framework.
Review of CRR/CRD
The European Commission (EC) will propose amendments to the prudential framework for banks in the upcoming review of the CRR/CRD (Capital Requirements Regulation (Regulation (EU) No 575/2013) and Capital Requirements Directive (Directive 2013/36/EU)) to ensure that ESG risks are consistently included in the risk management systems of banks. The EC will propose binding requirements and mandates for the European Banking Authority (EBA) and introduce a new mandate for EBA to issue guidelines on how banks can identify, measure, manage, and monitor ESG risks. Additionally, EBA will be mandated to issue guidelines on mandatory internal stress tests for banks to test their resilience to climate change risks.
Review of Solvency II Directive
In the upcoming review of the Solvency II Directive (Directive 2009/138/EC) in 2021, the European Commission will, based on the European Insurance and Occupational Pensions Authority’s work and investigations, propose amendments to consistently integrate sustainability risks in the prudential framework (risk management and supervision) for insurers. Additionally, insurers will be required to conduct a climate change scenario analysis to improve the sustainability risk management.
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
The European Commission (EC) will launch a public consultation on the functionality of the ESG rating market by Q4 2021. The EC will also take action to enhance the reliability, comparability, and transparency of ESG ratings by Q1 2023, building on the EU Study on sustainability-related ratings, data and research. Also, the growing demand for sustainable investments requires unbiased and reliable ESG research, based on transparent and comparable methodologies.
Review of IORP II Directive
The European Commission (EC) will ask the European Insurance and Occupational Pensions Authority 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. 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 proposal for a 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 to enhance 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 6), the European Commission (EC) will develop a robust monitoring framework and a set of indicators to measure capital flows to sustainable investments to be able 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 ECB, the ESRB, the ESAs, and the EEA in order to develop a common methodological base and to consistently and coherently integrate the double materiality perspective across the financial system of the EU by 2022. 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 will establish a Sustainable Finance Research Forum to strengthen the role of science. The forum would be tasked with increasing awareness on the use of Sustainable Finance research 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”. The European Commission will also propose to broaden and advance the work of the IPSF to new topics such as transition finance and biodiversity and suggest a stronger governance structure for the IPSF. Find the 2021 annual report of the IPSF here.
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).