RI's recent EU Sustainable Finance Action Plan update webinar series can be listened to in playback on the RI webinar page
EU Action Plan Updates: Beyond the Technical Expert Group
Martin Spolc, Head of the Sustainable Finance and Fintech unit in the European Commission's Directorate General for Financial Services, answers your webinar questions.
Q. Will the introduction of sustainability into the suitability test under the MIFID II and IDD delegated acts be postponed until the taxonomy is completed for E,S and G ?
Martin Spolc: The European Commission is currently working on the EU taxonomy for environmentally sustainable economic activities in the field of climate change. Further work will be undertaken from 2020 onwards to identify sustainable economic activities contributing to the other four key environmental objectives completing the work on the EU taxonomy. The introduction of sustainability into financial advice (“suitability test”) under MIFID II and IDD delegated acts are not directly linked to a possible completion of the taxonomy. Those legal acts make reference to the Regulation on disclosures on sustainable investments and sustainability risks which should be published in the Official Journal of the European Union shortly. The MIFID II and the EIOPA Insurance Distribution Directive (IDD) delegated acts shall become applicable one year after their publication in the Official Journal of the European Union. Their adoption process is ongoing.
Q. Would corporate disclosure be limited to activities in the EU – or worldwide?
Martin Spolc: Corporate sustainability disclosure (Action 9 of the Action Plan) helps enhance climate and sustainability related information provided by corporations. Depending on the results of a fitness check, a review of the Non-Financial Reporting Directive (NFRD) might be considered. The NFRD is limited to corporates in the EU. Concerning obligatory disclosure requirements (for financial market participants) under the EU taxonomy on environmentally sustainable economic activities, this is also limited to financial market participants marketing investments products as ‘green’ within the EU.
Q. Do you see a risk that taxonomy-related disclosure becomes mandatory before we get disclosure from companies, and therefore the market is left to make estimations?
Martin Spolc: The timing of the application of the taxonomy related disclosure requirement is subject to ongoing negotiations. Regarding disclosure from companies, the revised guidelines of the NFRD encourage large listed companies to disclose relevant climate relevant information.
Q. Do you see the reform of NFRD, and an extension to all listed issuers, as a mechanism to solve the data issue that some market participants cite as a barrier to embracing ESG integration?
Martin Spolc: Reforming the NFRD to result in better and more coherent, comparable data from corporates could be an important step in the direction of providing useful ESG data to the market. The NFRD reform is thus relevant to address the current lack of ESG data.
Q. Do you not think that non-legally binding company disclosure requirements hinders standardisation and scalability?
Martin Spolc: The European Commission’s NFRD requires corporates falling under the NFRD to report relevant ESG issues. Reporting on ESG is thus a mandatory requirement. What is not legally binding is the format and exact content of the reporting suggested by the European Commission through its guidelines. Corporates can use the European Commission guidelines, or use other reporting formats.
However, we expect corporates to make use of the European Commission’s guidelines. Together with other private and public standard setters, including those at a global level, the European Commission tries to reach the highest possible standardisation and scalability.
Q. How do you harmonize the EU Action plan with other national and international standards. For example, the taxonomy prescribes 100MW energy savings, an "international standard" prescribes 150 MW energy savings. Do we follow the taxonomy or the international standards?
Martin Spolc: The European Commission believes that we need an EU-wide taxonomy that is robust, evidence- or science-based and ambitious, allowing us to reach our EU environmental objectives and those of the Paris Climate Agreement. The current proposal for an EU Taxonomy for environmentally sustainable economic activities as developed by the Technical Expert Group on sustainable finance is based on the existing EU environmental acquis (legislation and technical criteria derived from EU legislation) and is, to the extent possible, evidence- or science-based.
At the same time, the EU taxonomy tries to harmonise with international standards as much as possible. In particular, the Commission is engaging with like-minded jurisdictions through a newly established International Platform on Sustainable Finance (IPSF) to discuss how the various taxonomies existing in the various jurisdictions can be aligned, where possible.
Q. For the moment, there is no standard on ESG factors. In the meanwhile, how can banks work to be sure that they are going in the right direction?
Martin Spolc: Different definitions and frameworks to capture ESG factors are being used in the market. The upcoming Regulation on disclosures on sustainable investments and sustainability risks provides definitions of E, S and G, so does the NFRD. Other frameworks developed by industry, for instance in the field of private equity, are also applied by financial institutions. From a pragmatic point of view, banks and other financial institutions can make reference to such frameworks or definitions, in order to explain their approach.
Q. The EU taxonomy (and other initiatives) are focusing on climate. What steps are being taken to speed up action on other areas covered by the SDGs; for example air and water pollution?
Martin Spolc: Due to the urgency to deal with climate change, the Commission started to work on these topics. Work on broader environmental topics will follow very soon, including development of technical criteria for a taxonomy in the field of sustainable use and protection of water and marine resources; and pollution prevention and control. The Commission is also aware and welcomes the increasing interest of investors to align their investment with social objectives and the broader UN 2030 Sustainable Development Goals.
Under the newly proposed European Green Deal, the “Just Transition” will be an important aspect of the whole strategy. Therefore, the Commission is currently exploring steps to address the Just Transition also in financial markets.
Q. When will the requirements on investment advisers to ask about ESG preferences come into force?
Martin Spolc: The MIFID II and IDD delegated acts shall become applicable one year after their publication in the Official Journal of the European Union. Their adoption process is ongoing.