The European Commission has spoken: All EU policies must now fall in line with green ambitions

Yesterday, the European Commission confirmed it would pursue a legally-binding commitment to climate neutrality by 2050, to offer investors a more predictable pathway for decarbonisation and green finance. But that wasn’t all that was in the European Green Deal. 

In a 24-page communication issued to the other bodies of the EU, the Commission outlined its plans to push for stronger ESG disclosure, a global carbon price, a “regulatory and non-regulatory” clampdown on greenwashing and the need for all future EU policy to give a nod to Europe’s environmental objectives. 

It promises a “renewed sustainable finance strategy” in the second half of next year, which RI understands will be a revision of the Action Plan on Sustainable Finance – the original policy agenda of the Commission, released in 2018. However DG FISMA, the department within the Commission that oversees the Action Plan, did not confirm this or respond to requests for information. 

 Other strategies that will be launched on the back of the Green Deal include: 

• An industrial strategy, covering the green and digital transformation, to be launched in March
• A circular economy ‘action plan’, with a focus on plastic, textiles, construction and electronics
• A strategy on climate adaptation, slated for next year
• A strategy for sustainable and smart mobility, also due in 2020

Reporting and disclosure 

The European Fund and Asset Management Association (EFAMA) said it “wholeheartedly support[s]” the Green Deal, adding that the industry was committed to “channelling the necessary funds for projects which are essential to its success”. However, it repeated its point that companies need to disclose solid ESG data before the asset management industry can step up much further. 

 In response to this very point, the Commission has confirmed the Non-Financial Reporting Directive (NFRD) will be reviewed in 2020. It was an “inevitable” move, according to Eleni Kanelli, Head of Advocacy at Accountancy Europe, who pointed out that the NFRD “just scratches the surface compared to how the market has developed” on sustainability since it was introduced. The NFRD is a piece of legislation from 2014 (whose transposition deadline was December 2016), and therefore a forerunner of the sustainable finance boom that came shortly afterwards. It requires large listed companies to disclose on so-called ‘non-financial’ information such as diversity, human rights, bribery and corruption and environmental performance. 

But the responsible investment industry is hungry for more of this kind of ESG data, as well as financial statements that assimilate and capture such information. Pretty much all the measures of the Action Plan on Sustainable Finance, including its new legislation on disclosures and the green taxonomy rely on such data, so the fact that it has been given an indicative timetable in the new Green Deal “says a lot”, according to Kanelli, who predicts it will be “the basis for a lot of things”. 

 RI understands that the Commission has tasked Brussels-based think tank the Centre for European Policy Studies with assessing the scope of the NFRD, looking at whether more companies should be covered by the requirements in future. CEPS could release the study by June 2020.

 Beyond its scope, other areas of the NFRD that may be reviewed include the way in which data is disclosed (integrated into financial reports or published in a separate document), and the level of standardisation and comparability. Kanelli added that the Commission may consider “level 2 measures to make sure that implementation is coherent”, referring to the EU’s Lamfalussy regulatory process in financial services.

Sustainable corporate governance 

In a leaked early draft of the Green Deal, there was a promising paragraph developing “item #10” of the Action Plan on Sustainable Finance (“fostering sustainable corporate governance and attenuating short-termism in capital markets”).

The draft stated that the need “to adopt a legislative proposal on sustainable corporate governance” would be assessed by 2021, but in the final version the reference to legislation has been dropped and it states simply: “Sustainability should be further embedded into the corporate governance framework, as many companies still focus too much on short-term financial performance compared to their long-term development and sustainability aspects.”

Linked to Action #10 is ongoing work by the Commission on corporate boards’ sustainability strategy, including due diligence throughout the supply chain; and clarification of directors’ duties with regard to company's long-term interest. (See one of the studies commissioned here)

Led by the Directorate-General for Justice and Consumers, all this work seems to be at an early stage compared to other items of the Action Plan.

It follows DG JUST’s conference earlier this year to investigate the concept of “sustainable corporate governance’, which tackled the debate of shareholder value primacy versus stakeholder value capitalism.

The dropped mention to legislation could have involved reviewing the Company Law Directive of 2017.  This has been proposed by Beate Sjåfjel, Professor of Law at the University of Oslo, among others.

Sjåfjel is also part of the team leading a research project called Sustainable Market Actors for Responsible Trade (SMART), which develops critical sustainable corporate governance issues. The final findings of SMART will be launched in February 2020. 

Biodiversity and natural capital 

 Biodiversity is a significant priority under the EU Green Deal, and the Commission has promised to revise Europe’s biodiversity and forestry strategies in March, when they expire. It’s an important signal to the market to widen the focus from climate change to other areas of sustainability. Investors are already beginning to turn their attention to biodiversity and natural capital, and the new frameworks could accelerate engagement. Speaking to RI this summer, France’s Axa said natural capital would be a significant new focus for its investment strategy, while the Dutch Central Bank’s sustainable finance platform now includes a working group dedicated to biodiversity, and think-tank Carbon Tracker has launched a sister organisation called Planet Tracker to push financial markets on “living nature”. 

 Next year, China will host the 15th COP to the Convention on Biological Diversity (CBD) – a key meeting which seeks to put in place a post-2020 framework for biodiversity protection globally. The release of the EU’s Biodiversity Strategy then, which will establish its negotiating position and propose “global targets to protect diversity”, will “ensure that the EU plays a key role” in proceedings. 

Many details have been kept under wraps, but among the measures that have been revealed are “proposals to green European cities and increase biodiversity in urban spaces” and the pursuit of “regulatory and non-regulatory measures to support deforestation-free value chains” put forward by the Commission earlier this year, looking into whether corporate boards should disclose sustainability strategies including supply chain due diligence and forward-looking sustainability targets. 

Additionally, the Commission will look to strengthen certifications schemes and voluntary standards which help the market identify deforestation-free products, such as integrating deforestation considerations into the EU Ecolabel – Europe’s official label to help consumers recognise ‘green’ goods and services. The Ecolabel will soon be extended to retail investment funds. 

The blue economy – another growing area of interest for investors in Europe – will also play a vital role in the Green Deal, according to the Commission. As part of its attempt to make the EU’s food system “the global standard for sustainability,” it wants to push seafood as a replacement for meat protein, for example. 

The social dimension 

The Green Deal doesn’t limit itself to green, though. The Commission has said the Sustainable Development Goals, which cover a broad range of social and developmental objectives as well a green ones, will be put “at the heart of the EU’s policymaking and action” from now on, and will be integrated into the European Semester. The Semester is a six-monthly process in which EU Member States agree to align their economic policies with agreed ‘big picture’ objectives. 

A Sustainable Europe Investment Plan will be also launched, dedicated to deploying public finance and stimulating private investment. Details are scant, but the Commission claims the Plan will support €1trn of sustainable investment by 2030. Notably, it will include a Just Transition Mechanism and dedicated Just Transition Fund, to ensure the social dimension of the climate transition is taken into consideration – an issue particularly important for Member States in Eastern Europe, and for the 159 investors ($10trn) that are currently signed up to the Statement of Investor Commitment to Support a Just Transition on Climate Change.

For details on the proposed revisions to Europe’s Emission’s Trading System, see RI’s coverage here. 

Note: The 'biodiversity and natural capital' section of this article was amended on December 13 for accuracy.