The European Commission has taken another step towards finalising its rules for what constitutes a sustainable activity, with the recent release of its first draft delegated act and technical screening criteria for the EU Taxonomy.
The development is just the latest step in the broader rollout of an interconnected set of policy measures the EU is pursuing to deliver on its international commitment to reach net-zero carbon emissions by 2050 and build resilience to climate change.
Someone paying close attention to these shifts in the regulatory landscape is Tim Farrar, Head of Public Affairs at Nordea Large Corporates & Institutions (LC&I). In that role, Farrar covers all major public policy initiatives and legislation that affect LC&I, including sustainable finance regulation.
“The sustainable finance regulatory landscape is fairly new and quite pervasive,” says Farrar. “It’s going to cut across almost every part of the bank’s value chain, and be embedded in a lot of existing regulation. So you can’t look at the pieces in isolation. You have to think quite broadly.”
Much has already been achieved on the public policy front since the EU launched its Sustainable Finance Action Plan in 2018, according to Farrar. This includes regulations and standards with a number of new key definitions, for example the Taxonomy; Benchmarks; various disclosure rules; the new EU Green Bond Standard; data proposals as well as an emphasis on managing ESG risks.
Start early, even without all the pieces in place
A lot of what has been defined is new, although some elements build on industry standards. There are also details still to be finalised, for example the Taxonomy’s technical screening criteria and level 2 measures on disclosures.
“Companies are still trying to get a grasp on the requirements as well as first-hand, practical experience with their application, especially regarding the Taxonomy as it applies to specific segments,” says Farrar. Some of the work may be able to piggyback on existing voluntary commitments or at least the experience gained there, he says.
Farrar notes that the new rules cover many areas, and understanding the dependencies and links is important, especially in the disclosure space where there are several requirements, including those embedded in the Taxonomy. Not all of the building blocks are in the place, and there is a challenge with the sequencing of deliverables, especially when it comes to data issues.
“There are well-documented data gaps and dependencies, and there’s much more work to be done in this space, particularly disclosures by non-financial corporates,” he says. “However, the message from policy makers and supervisors is to start early and not wait for all the regulatory rules to be in effect.”
The message from policy makers and supervisors is to start early and not wait for all the regulatory rules to be in effect.
Key policy developments to watch
On the near-term horizon, Farrar pinpoints the following policy-related activities to keep an eye on:
- With the first draft Taxonomy technical screening criteria now out, that will require a detailed assessment, and feedback is encouraged.
- The European Supervisory Authorities (ESAs) have been called to give advice on the Taxonomy’s so-called Article 8 disclosures. Article 8 requires those covered by the Non-financial Reporting Directive to publish information on how and to what extent their activities are aligned with the Taxonomy.
- The European Commission has launched a public consultation on sustainable corporate governance, asking how the EU can best go about helping businesses ensure that environmental and social interests are embedded in business strategies.
- A review of the EU’s Non-financial Reporting Directive (NFRD) is currently underway, as well as work on EU and international non-financial reporting standards.
- The EU is set to release its renewed sustainable finance strategy in early 2021. This year’s consultation on the renewed strategy included a wide range of topics. Farrar highlights the following:
- Future development of the taxonomy, including,
- Delivery of the remaining criteria (included in the current plan)
- Review of the need for a so-called “brown” and social taxonomy
- Addressing data gaps, including a new regulatory proposal for the NFRD, and possibly actions in the ESG data and rating space
- Further focus on corporate governance and long-termism
- Incentives and disincentives, including those outside financial services segment
- Further work on integrating ESG risks
- Future development of the taxonomy, including,
- Farrar is also keeping an eye on the European Commission’s proposal to increase its 2030 greenhouse gas reduction target and suggested actions to deliver on this. It would require even more momentum in key areas, such as energy and buildings, he says, and even more private capital directed to relevant projects.
See the table below for a full timeline of upcoming EU policy activities, assembled by the Association for Financial Markets in Europe.
Transition risks include policy after all, so it is in all of our interest to manage this well.
Engaging in dialogue
While much has been done, in some sense the work is just getting started, says Farrar. The bulk of rules from the first action plan are not yet in application, and the renewed plan is expected in early 2021. The renewed plan builds on the first plan and deals with some unfinished business, but expect many new elements and a shift in focus to other actors in the economy, he says.
It is important for financial and non-financial counterparties to have a good dialogue around these issues, to understand the impact of these changes on transition planning, and also practical matters like data, Farrar adds, noting that such topics are useful to include as part of the regular dialogue around sustainable finance.
A lot of change needs to occur, and a clear and predictable policy direction will help avoid the need for more forceful and abrupt policy interventions further down the road, he says, adding:
“Transition risks include policy after all, so it is in all of our interest to manage this well.”
Sustainable Finance: A timeline of policy activities
|Oct-20||Consultation Paper – EC – Sustainable corp governance & due diligence||Commission|
|Oct-20||Consultation Paper – IFRS Foundation – Global ESG reporting standards||IFRS Foundation|
|Nov-20||Consultation Paper – EC – Delegated Acts: Taxonomy climate change mitigation & adaptation Technical Screening Criteria||Commission|
|Nov-20||Consultation Paper – EBA – Pillar 3 Implementing Technical Standards & Art 8 Taxonomy||EBA|
|Nov-20||Consultation Paper – ESMA – Art 8 Taxonomy KPIs||ESMA|
|Nov-20||Consultation Paper – EBA – ESG RM&Supervision||EBA|
|Dec-20||EC – Delegate Act adoption, MiFID II & ESG||Commission|
|Dec-20||EC – Delegate Act adoption, Taxonomy, climate change mitigation & adaptation Technical Screening Criteria||Commission|
|Jan-21||EC – Renewed Sustainable Finance Strategy||Commission|
|Jan-21||EFRAG – Report on standards for sustainability disclosure||EFRAG|
|Jan-21||ESAs – Final SFDR Regulatory Technical Standards||ESAs|
|Feb-21||EBA – Advice to EC, Taxonomy, Art 8 disclosure||EBA|
|Mar-21||EC – Proposal on NFRD review||Commission|
|Apr-21||Consultation Paper – EC – Delegated Acts: Taxonomy, Art 8 disclosure||Commission|
|Apr-21||Consultation Paper – PSF – Report on Technical Screening Criteria for remaining env objectives||Platform on Sustainable Finance|
|May-21||PSF – Final report on Technical Screening Criteria for remaining env objectives||Platform on Sustainable Finance|
|Jun-21||EC – Delegate Act adoption, Art 8 disclosure, Taxonomy||Commission|
|Jun-21||EBA – Final Report on Pillar 3 Implementing Technical Standards||EBA|
|Jun-21||EBA – Final Report on ESG RM&Supervision||EBA|
|Jun-21||EC – Proposal on sustainable corp governance & due diligence||Commission|
|Jun-21||EC – Proposal on EU Green Bond Standard||Commission|
Glossary of acronyms:
EBA: European Banking Authority
EC: European Commission
ECB : European Central Bank
EFRAG : European Financial Reporting Advisory Group
ESAs: European Supervisory Authorities
ESG: Environmental, Social and Governance
ESMA: European Securities and Markets Authority
IFRS Foundation: International Financial Reporting Standards Foundation
KPI: Key performance indicator
MiFID II: Markets In Financial Instruments Directive II
NFRD: Non-Financial Reporting Directive
PSF: Platform on Sustainable Finance
RM: Risk management
SFDR: Sustainable Finance Disclosure Regulation
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