EU regs in 2024: Riding the regulatory wave (and the big SFDR review)

Implementation and streamlining of existing rules in focus for 2024, with all eyes on EU elections in June and the implications for the sustainable finance agenda.

When Valdis Dombrovskis, the EU trade commissioner and initiator of the bloc’s sustainable finance action plan, told a full conference room in Brussels last month that “in the past years we’ve been involved in a very intensive legislative agenda”, it almost sounded like an understatement.

In the space of a few years, the EU has rolled out a flurry of new sustainable finance rules, and in 2023 some of the last pieces of the puzzle fell into place.

For example, the first set of sector-agnostic European Sustainability Reporting Standards (ESRS) were adopted, as was the delegated act covering the four non-climate objectives needed to complete the EU taxonomy. Both will apply from 2024.

Looking ahead to 2024, Dombrovskis said: “We are now in a process of stocktake.”  The next steps will involve assessing inconsistencies and overlaps, and look at streamlining efforts to “make it a less burdensome process, while reaching the same policy objectives”, he added.

Martin Spolc, sustainable finance head at the commission’s financial services arm, confirmed at the same event that for the current commission “the regulatory wave has finished” and “now is the time for implementation”.

But there are still some notable things in the pipeline for 2024 that stakeholders aim to push over the line ahead of the European Parliament elections in June, which will be the end of the current five-year legislative mandate.

The Corporate Sustainability Due Diligence Directive (CSDDD) is expected to get final approval next year and negotiations between the European Parliament and EU Council on the proposed ESG ratings regulation are due to start in January, after the Council came to an agreement on its negotiating position this week.

From supervisor ESMA, investors can expect guidance around the use of ESG and sustainability terms in fund names in the second quarter of the year.

While most investors are largely opposed to this idea, the clarity will likely be welcome, as will the watchdog’s move to ditch a disliked proposed threshold for those with sustainability-related terms to allocate at least 50 percent of their assets to sustainable investments as defined by the Sustainable Finance Disclosure Regulation (SFDR).

It had also been expected that the commission might consult on the possible introduction of ESG benchmark labels during the ongoing mandate but, as RI recently reported, this idea has been shelved.

Disclosures evolving

For investors, the most closely watched regulatory development next year will likely be the SFDR review, which could result in a major overhaul of the legislation (although that would not be implemented until later).

The consultation finishes this week, and as RI reported, battle lines are being drawn around whether to work with the existing Article 8 and 9 categories or draw up new ones.

When the consultation was launched, there seemed to be an expectation that investors would lap up the idea of clearer and more thematic system outlining sustainability and transition categories.

But it is important to not forget how much time, effort and resources investors have put into the SFDR since it came into force in 2021. It is clear that some do not want to give this up, and think abandoning Article 8 and 9 would result in more headaches.

Regardless of what the SFDR will look like in future, 2024 will mark the arrival of a new source of underlying data that investors can use to fulfil their disclosure requirements and to help finance climate and transition objectives.

Next year will be the first CSRD reporting period. It will initially cover companies in scope of the existing non-financial disclosure rules – before expanding gradually to more than 50,000 entities – but should provide some early signs of how useful and comparable the disclosures will be in the first reporting periods.

The unexpected decision by the commission this summer to ditch mandatory reporting indicators on climate and some of the data points stemming from the SFDR, and instead make all disclosure subject to materiality assessments, has proved unpopular with investors.

The first batch of reporting will shed some initial light on how companies will determine what is material to them – and whether this is in line with investor and other stakeholder expectations.

The results of the 2023 reporting period on the EU taxonomy will also be interesting to analyse in 2024, given average reported alignment with the objectives has so far been fairly low.

Nevertheless, the Commission said, the 2022 reporting period showed “encouraging signs” that “the EU taxonomy is increasingly being used by undertakings to signal their sustainability performance and efforts”.

EU election and transition finance

While the foundation for the EU sustainable finance agenda have been laid, the upcoming European elections in June could bring some uncertainty.

Members of the European Parliament will be elected to serve until 2029 and, following the election, the new Parliament will choose a new head of the commission and approve a team of commissioners.

At the moment, it is expected that conservative and right-wing groups will see an upswing and that socialist and green MEP groups will see losses.

In 2023, the CSRD and CSDDD came under pressure from MEPs to the right.

In addition, corporate lobbying against the CSRD has been fierce. It is widely believed to have pushed the commission to water down the ESRS – in addition to shifting to a materiality approach, it introduced further phase-ins and made some data points completely voluntary – as well as delaying sector-specific standards and continuously promising to reduce the burden on corporates.

This could make the next legislative period a difficult one. “We should probably not expect many sustainable finance regulations in the next mandate,” said one observer. “The mood is very gloomy.”

As previously reported in our subscriber-only newsletter, the same person warned that the anti-ESG movement could gain further ground in the region.

“Europe has to be ready for a backlash – I’m still amazed it hasn’t happened. But I think you’ll see significant pressure on the ESRS and the taxonomy because of competitiveness. There will be serious and tough questions from the business lobby.”

Paul Tang, a Dutch S&D MEP who served as rapporteur on the Green Bond Standard and SFDR, also told RI there is a risk of a backlash, and that the EU needs to double down on its focus on transition finance to avoid this happening.

At last month’s Brussels event, he flagged this again, saying that the transition “is a huge political advantage in that it becomes a broader agenda” – not focusing only on what is green, but also on what can become green.

“In the next six months, work for the next commission is prepared and this is our chance to impact that,” he said. “We need to translate all our hard work into victory.”

The commission did this year weigh in on transition finance, publishing non-binding guidance in June on how to use existing legislation to finance the transition.

Dombrovskis said it is early days, and he would like to see how these recommendations are taken up “before deciding whether it should be followed by a legislative proposal”. “I can imagine this would be a topic for the next commission,” he added.

But he warned against immediately concluding that the EU taxonomy should be expanded to cover transition activities. “Rolling out taxonomies like the one we already have is a very complex exercise. We would want to be careful about what we’re prioritising.”

However, it seems somewhat inevitable that transition finance will end up on the EU legislative table in some shape or form in the coming period.

The concept is increasingly gaining ground with the push for transition plans, and the stronger focus on the transition in the UK and other regimes currently in the process of rolling out their sustainable finance rules.

Reflecting on what is currently in place in the EU, Tang said: “We’ve achieved a lot [but] it’s not perfect, and still work in progress.”

Stressing the need to improve but also continue to move at a decent pace, he added: “You can’t build Rome in a day, but then unlike Rome we don’t have 1,000 years to complete the [sustainable finance] agenda – it needs to be completed in the next five years.”