February saw a number of big moves on sustainable finance at EU level. The European Securities and Markets Authority (ESMA) launched its sustainable finance strategy, committing to focus on ESG in credit ratings, and revealing its current work on identifying areas of existing financial regulation that could enable greenwashing. ESMA has a long-standing reputation among observers of the EU’s sustainability efforts for not taking the agenda very seriously, so its pledge to launch its own ESG workstream, look into climate stress tests and accept new supervisory mandates on sustainability are being viewed as a welcome signal. Fellow supervisor, the European Banking Authority, launched a similar strategy in December. ESMA’s decision to focus on credit ratings chimes with comments made yesterday by the President of the European Central Bank, Christine Lagarde, who said the Eurosystem is in the process of “reviewing the extent to which climate-related risks are understood and priced by the market and is paying close attention to how credit-rating agencies incorporate such risks into their assessments of creditworthiness”. Lagarde said the ECB’s collateral framework was also up for discussion in terms of integrating climate risk.
The Basel Committee on Banking Supervision recently established a high-level Taskforce on Climate-related Financial Risks that will publish analysis on "the measurement and transmission channels of climate risk for banks" and develop "effective supervisory practices to mitigate such risks". The Committee met this week to discuss banking risks more broadly, and discussed the Taskforce’s workplan and output. It will publish a "stock take" of current initiatives in this area next month.
Another major development was the launch of the consultation on the Non-Financial Reporting Directive, whose overhaul is a key project for the European Commission this year, as it strives to strengthen the quality of ESG reporting by companies. To increase standardisation and robustness, the Commission looks likely to move away from using a Directive format – in which Member States have the freedom to transpose the rules in different ways, as long as they are seen to meet the objective of the law – towards drafting a Regulation, where the rules are set in stone at EU level. The consultation on the update is open for 12 weeks and the Commission plans to draft the new laws by the autumn – around the time it releases its next set of sustainable finance policy objectives.
To help push the reporting agenda, new guidance was issued earlier this month from The European Corporate Reporting Lab, a group of market experts convened by the European Financial Reporting Advisory Group as part of the Action Plan. They assessed 150 companies on climate reporting and scenario analysis, and highlighted 30 that were particularly good. They’re now asking for feedback.
Last month, RI reported that DG Just, the unit within the Commission that deals with justice and consumers, had commissioned a report by the British Institute for International and Comparative Law on due diligence in supply chains. That report has now been published, and more details can be read here, but the suggestion is that the Commissions should consider introducing mandatory reporting requirements for environmental and human rights issues in supply chains.
March will be an especially busy month for the EU Action Plan on Sustainable Finance, because the Commission is hosting its annual conference dedicated to the topic. RI understands that more than 1,000 people have applied to attend the conference on March 12, which can only accommodate 450 attendees, so it will also be livestreamed. The event will be used to launch the final report from the Technical Expert Group on the green taxonomy, and to promote a consultation that will be kicked-off in the coming weeks on what should be included in the next version of the EU Action Plan (known as the renewed strategy). On March 25th, there will be a smaller event in Brussels dedicated to digital sustainable finance.
It was expected that the final legal text for the taxonomy, which was agreed in December, would be voted through Parliament at plenary in March, or possibly April, but RI understands this has now been postponed until June. It’s not anticipated to be a game-changing vote, and the Commission will probably plough on with its plans to recruit members to the new Sustainable Finance Platform in April. The platform will be the body that advises on the future development of the taxonomy, and ESMA has already confirmed it will be a member. This week, Impact-Cubed, a firm that specialises in portfolio impact measurement, became the latest to pile in on taxonomy-related products and services, launching a "greenwash checker" that claims to tell investors whether their investments are aligned with the new EU framework and "avoid having their funds labelled as ‘greenwash’".
On the benchmarking regulation – the creation of low-carbon and Paris-aligned index categories, and broader requirements for ESG disclosure in indices – the delegated acts, which will provide more details on the laws, are due to be published in “early spring 2020” for a four-week public consultation. Views are divided on the current direction of the regulation, with index provider Scientific Beta publishing a scathing attack on the current plans earlier this week, saying they favoured the companies included on the Technical Expert Group on Sustainable Finance at the expense of fair competition, and that they were “drawn up hastily by a working group dominated by providers of ESG data and services and did not include pension funds and that puts forward pointless and costly reporting obligations for which no impact study was carried out by the Commission”. More details can be read here.