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Legislation on sustainable finance to be kick-started by EU this week

European Commission will table its first proposals

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The European Commission will submit its first three legislative proposals under its Action Plan on Sustainable Finance this week, and announce which market players have been selected to help it develop its definitions of what counts as sustainable.
The Commission expects to make the announcement on Thursday. RI understands the proposals will be more-or-less aligned with the Commission’s Action Plan on Sustainable Finance, published in March, and will kick-start the process of realising the document’s ambitions.

Sustainable Taxonomy

Firstly, the Commission is expected, as stated in the Action Plan, to propose regulation that will enable an EU taxonomy on sustainable finance to be created and “regularly updated”, laying out the principles and scope of the initiative. A Technical Expert Group on Sustainable Finance will be publically announced this week, and will oversee the evolution of the taxonomy, “establishing an EU classification system for sustainable activities”. Its development has been underway informally since the inception of the High Level Expert Group on Sustainable Finance (HLEG) at the end of the 2016, under the stewardship of the European Investment Bank; but the Action Plan says the new group will have to provide an official version early next year, focusing on climate mitigation. However, insiders say the plan is now to move on to adaptation, waste, water and the circular economy by the end of this year. The taxonomy is expected to become legally binding at EU level towards the end of next year, and will underpin the creation of standards, labels, benchmarks and potential capital ratio changes. The Technical Expert Group is expected to include former members of HLEG, alongside new experts. There have been calls from market participants for the group to include more banking representatives than were seen on HLEG, as well as more individuals from scientific backgrounds, with a broader range of EU countries represented. The group will also be tasked with producing a report next year on how to create an EU green bond standard, although insiders say the work on green bonds has “proved more complicated than first thought” and won’t feature heavily in this week’s round of announcements.

A “platform on sustainable finance” is planned to launch alongside the regulation in the third quarter of 2019.

Investor duties

Secondly, the Commission is expected to take forward HLEG’s proposals on investor duties. As stated in its Action Plan, it will table a proposal to “clarify institutional investors’ and asset managers’ duties in relation to sustainability considerations” and more concretely, amend “MiFID II and IDD delegated acts to enhance consideration of sustainability in suitability assessment” this month.“The proposal will aim to (i) explicitly require institutional investors and asset managers to integrate sustainability considerations in the investment decision-making process and (ii) increase transparency towards end-investors on how they integrate such sustainability factors in their investment decisions, in particular as concerns their exposure to sustainability risks,” the Commission said in March.
Part of this proposal is slated to be a request for more disclosure from asset managers and asset owners on the topic – “in particular for their exposures to climate change-related risks”.

Benchmarks

Thirdly, insiders say the Commission will push ahead with a proposal on benchmarks. It will adopt delegated acts to address the transparency of index methodologies – particularly those promising low-carbon alignment – to enable investors to “better address the quality” of sustainability benchmarks. It may also announce an initiative to create “a designated category of benchmarks comprising low-carbon issuers”. If it does the latter, its newly-appointed Technical Expert Group will publish a report next year on how to design such benchmarks so that they align with the EU’s 2°C policy objectives.
Earlier this month, the European Commission detailed its plans to create an InvestEU Fund to help finance its sustainability goals as part of the post 2020 European budget. The fund, an evolution of the current European Fund for Strategic Investments, will provide EU guarantees via the EIB and other partner institutions to scale up debt and equity investing into eligible projects with the hope of creating solutions that can be adopted by individual member states too. It will also be used for other policy objective as well as social and environmental ones.
The Action Plan stated in March that the Commission will begin, by the end of June, assessing the possibility of applying the existing EU Ecolabel to financial products. It will also engage stakeholders on the potential for changing the mandate of credit rating agencies so they must integrate ESG into their assessments “in a proportionate way to preserve market access for smaller players”.