The package of sustainable finance measures adopted by the European Commission on 21 April 2021 is aimed at improving the flow of money towards sustainable investments. The package centres around three initiatives: (i) a proposed Corporate Sustainability Reporting Directive ("CSRD"); (ii) the EU taxonomy; and (iii) amendments to the UCITS, AIFMD, MiFID II, Solvency II and IDD frameworks relating to sustainability.
CSRD Proposal – A proposed directive seeking to amend the Non-Financial Reporting Directive ("NFRD") to:
(i) broaden its scope. By way of reminder, NFRD lays down rules on disclosure of non-financial and diversity information in annual reports which currently only apply to certain large companies; and
a. a requirement for the reporting of sustainability information to comply with mandatory EU sustainability reporting standards; and
b. an audit requirement for reported sustainability information.
The European Financial Reporting Advisory Group ("EFRAG"), the group to be assigned responsibility for the development of these standards, recently published a report proposing a roadmap for the development of these standards. The intention is that these standards will be developed in tandem with the movement of the CSRD proposal through the European legislative process.
The aim of this proposal is to ensure that companies are reporting sustainability information in a consistent and comparable manner and that such information meets the needs of investors and other financial market participants that require this information in order to satisfy requirements set out in the Disclosures Regulation. In addition, the proposal seeks to ensure consistency between reporting requirements under the Taxonomy Regulation and company sustainability reporting.
EU Taxonomy – A classification system for environmentally sustainable economic activities, the purpose of which is to establish the degree of environmental sustainability of an investment. While the initial focus is on environmental objectives, the intention is to broaden the classification to cover social objectives in due course. The framework for the Taxonomy is set out in the Taxonomy Regulation, with four environmentally sustainable criteria to be considered in the context of six distinct environmental objectives (details of these criteria and the objectives are set out in our advisory from July 2020).
The European Commission was tasked with establishing technical screening criteria to be used to determine how environmentally sustainable an economic activity is. The EU Taxonomy Climate Delegated Act (the "Delegated Act") adopted as part of this package of measures contains the technical screening criteria relating to two of the six environmental objectives, climate change mitigation and climate change adaption. The annexes to the Delegated Act contain the criteria to determine whether an economic activity can be considered to make a substantial contribution to climate change mitigation (Annex 1) or climate change adaptation (Annex 2) and to do no significant harm to the other environmental objectives. The determination as to whether to include or exclude certain sectors (nuclear power, agriculture) has been the subject of much discussion and the Q&A on the Delegated Act published by the European Commission as part of this package of measures provides further information on the inclusion or exclusion of these sectors. The screening criteria set out in the Delegated Act are intended to be dynamic and will be subject to regular review, ensuring that new sectors and activities, including transitional and enabling activities, can be included over time. These criteria will need to be taken into account, from 1 January 2022, by those entities that disclose the extent to which their investments are Taxonomy aligned.
Sustainability Amendments – Drafts of the six delegated acts adopted by the European Commission as part of this package of measures were originally published in June 2020 and subject to a consultation process (our advisory from July 2020 focuses on the amendments to the UCITS and AIFMD frameworks). Amendments are being made to the legislation governing UCITS, AIFMs, insurers, investment firms and advisers, and seek to clarify how sustainability risks and other sustainability factors can be integrated into the organisational, operational and risk management processes of these entities. In addition, the amendments will require those providing investment or insurance advice to obtain information about their clients' sustainability preferences and take these into account when providing advice. While these amendments have been adopted by the European Commission they are now subject to scrutiny by the European Parliament and the Council with the current intention being that these amendments will apply from October 2022.
The European Commission intends to publish its renewed sustainable finance strategy in the coming months which will detail further initiatives to steer capital towards sustainable investments.