Sustainable Finance Action Plan – regulation memo

In 2015, the adoption of the United Nations (UN) 2030 Agenda for Sustainable Development and the Paris agreement marked a significant shift in global attitudes towards climate change and sustainability. On 8 March 2018, the European Commission (EC) published a first sustainable Finance Action Plan to channel more funding to environmentally sustainable economic activities and first to activities that enable to reach a carbon–neutral and climate resilient economy by 2050. In the context of the EU Green Deal a renewed sustainable finance action plan will be published end 2020 /early 2021.

About Sustainable Finance Action Plan

The first action plan on sustainable finance has mainly resulted in regulatory initiatives introducing transparency requirements for financial products (IORPs and private pensions, managed portfolios, UCITS, AIFs, insurance-based products) marketed in the EU and they manufacturers and advisers on sustainability risks and adverse impacts on sustainability factors.

In the context of the last CRR/CRD review, integration of ESG considerations into EU banking regulation were also agreed and particularly a requirement for large, listed institutions to publicly disclose ESG risks.

Scope

Key regulatory initiatives whose level 1 texts have been adopted in 2019 are the following ones:

  • The EU Taxonomy Regulation  defines environmentally sustainable economic activities and introduces transparency requirements :
    • On the proportion of investment in environmentally sustainable  economic activities for financial products with environmentally characteristics or sustainable investment as objective and,
    • On the proportion of revenues, investments and expenses associated with such activities for companies subject to the Non-Financial Reporting Directive (NFRD).
  • The sustainability-related disclosure regulation   introduces new transparency requirements :
    • On consideration of sustainability risks borne by financial products, 
    • On policies on consideration of  adverse impacts  on environmental and social matters and associated indicators  for  manufacturers of financial products in the scope of  application of NFRD, financial products manufactured by them and   for financial products with environmentally sustainable investments as objectives;
    • On the description of ESG characteristics or sustainable investments as objective in pre-contractual documents and on their attainment in periodic report.
  • The low-carbon benchmark regulation :
    • Defines two new EU voluntary  standards ( the EU climate transition benchmark and the Paris-aligned benchmark) for EU low carbon benchmark that are on a decarbonisation trajectory ;
    • Introduces new transparency requirements on consideration of sustainability factors by benchmarks (with the exception of interest and currency rate benchmarks).
  • In June 2020, the EC has published draft delegate acts :
    • for the UCITS Directive, AIFMD, MiFID II, SOLVENCY II  to align the risk management process and due diligences with  new transparency requirements under the  sustainability-risk disclosure regulation;
    • for MFID II and IDD  to define which category of financial product can be advised for a client who has expressed sustainability preferences  when asked the  question as required by suitability assessment. 

Industry implications

Although corporates, institutional investors and banks welcome the sustainable finance action plan, they are faced with a very challenging implementation timeline as the first date of entry into application is 10 March 2020, while implementing texts and delegated acts still remain to be adopted. This results in uncertainty:

  • on  granular data to be collected from investee companies by manufacturers of financial products who  are concerned by availability, reliability and costs of those data,
  • on the characteristics of  financial products that can be advised to clients that have sustainability preferences which could be restricted to financial products that invest in sustainable investments or consider adverse impacts on sustainability factors.  

BNP Paribas Securities Services’ view

To solve the lack of reliable and standardised data made publicly available by investee companies, even when in the scope of application of NFRD, the EC has decided to review NFRD.  The expected EC proposal for a review of NFRD in Q1 2021 is expected to be part of the data gap solution together with the following actions contemplated by the consultation on a renewed sustainable finance action plan published in April 2020:

  • Creating an open and centralised database on ESG data collected from companies
  • Enhancing the quality of data providers on ESG research and ratings
  • Promoting sustainable finance globally

Key dates

24 May 2018 – Publication by the EC of the legislative package

30 April 2020 – Entry into application of the EU low carbon benchmark regulation

31 December 2020 – Expected date of adoption of delegated act of the EU taxonomy regulation for economic activities that contribute to climate change mitigation and adaptation

10 March 2021 – Expected date of entry into application of the sustainability related disclosure regulation for consideration of sustainability risks  

30 June 2021 – Expected date of entry into application of the sustainability related disclosure regulation for policies on consideration of adverse impact on sustainability factors for manufacturers of financial products subject to NFRD 

31 January 2022 – Expected date of adoption of delegated act of the EU taxonomy regulation for economic activities that contribute to pollution prevention, circular economy, protection of water resources, healthy ecosystems 

1 January 2022 – Expected date of entry into application of the EU taxonomy regulation for climate change mitigation and adaptation and expected   date of entry of application of sustainability-related disclosure regulation for information in periodic report of financial products 

June 2022 – Expected date of entry into application of the sustainability-related disclosure regulation for the disclosure of adverse impacts indicators on sustainability factors by   manufacturers of financial products subject to NFRD

June 2022 – Disclosure by large credit institutions of their exposure to ESG risks

30 Dec 2022 – Expected date of entry into application of the sustainability-related disclosure regulation for the disclosure of consideration of adverse impacts on sustainability factors by   all financial products of a manufacturer subject to NFRD

1 January 2023 – Expected date of entry into application of the EU taxonomy regulation for pollution prevention, circular economy, protection of water resources and healthy ecosystems